Some Thoughts About Bitcoin Futures

Last week, I published an article about the viability of Bitcoin Exchange Traded Funds(ETFs) as a vehicle to bring digital currencies to financial exchanges and institutional investors. One of the points I mentioned in that article was that the creation of Bitcoin options could be a strong move towards the implementation of an ETF. Well, it seems that we are getting even closer.

A few hours after my article, the CME Group Inc announced its plans to launch a futures contract based on Bitcoin. The CME Group is the biggest exchange group in the world and has a long-established reputation for innovating in options and futures products. Needles to say that the announcement represents one of the strongest endorsements of the cryptocoin to this day and it helped push its price passe the $7000 level.

The creation of Bitcoin Futures can become one of the pivotal moments in the history of Bitcoin. In addition to having the biggest options house in the world staking its reputation behind Bitcoin, Futures are likely to be the vehicle by which institutional investors get a more analytical exposure to Bitcoin. The CME vote of confidence can also have profound implications for the near term price of Bitcoin. Let’s explore those ideas and some other perspectives about how Bitcoin Futures can impact “the future” of Bitcoin. See what I did there? ;)

1 — Short Positions

Today, Bitcoin remains almost exclusively a “long trade”. There is not easy way for investors to bet on the decline of the price of the cryptocurrency (read my article about this subject). Futures will allow long investors to buy contracts based on a predicted increase of the price of Bitcoin while short investors can purchase contracts that bet on a price drop. This is effectively a way to short Bitcoin.

2 — Price Predictability

A side effect of the previous point cab help to bring some stability or predictability to the price of Bitcoin. Future contracts match the expectations of long and short investors. Investors can use Bitcoin Futures as a pragmatic data point about the market’s view of the cryptocoin which should help to set a baseline for investments. Similarly, if the price of Bitcoin starts raising, short investors will be forced to cover their positions which will create automatic resistance levels.

3 — More Sophisticated Trading

Trading Bitcoin Futures on the CME Exchange will setup the foundation for more sophisticated trading models involving Bitcoin. The futures model can/will be used in advanced trading strategies that can include Future contracts of other securities, commodities and other financial artifacts.

4 — Other Exchanges to Follow

CME is not the only accredited financial exchange planning to launch a Bitcoin Futures product. Cboe Global Markets Inc. also announced that is working on a Bitcoin Futures contract to be launched at the end of 2017 or early 2018. If those attempts receive positive traction, other exchanges should soon follow.

5 — Futures for Other Digital Currencies and Tokens

If either CME or Cboe is successful with their respective Bitcoin Futures product, that should open the door to similar Futures contracts for other digital currencies such as Ether, Dash or LiteCoin. Down the road, Future Contracts can also be applied to digital tokens launched via initial coin offerings(ICOs).

CEO of IntoTheBlock, Chief Scientist at Invector Labs, I write The Sequence Newsletter, Guest lecturer at Columbia University, Angel Investor, Author, Speaker.

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