Bitcoin Futures - What They Mean

Just about a week ago the Chicago Board of Exchange Futures, CBOE, began trading Bitcoin Futures. The Chicago Mercantile Exchange, CME, also launched recently. These are huge steps for Bitcoin becoming more visible to the public, but many people dont understand the implications tied to this or what it even means exactly. Futures contracts can be hard to understand when trying to learn about them yourself and when reading about the Bitcoin futures in articles.

A “future” is just a contract to buy or sell something, in this case it would be Bitcoin, at certain price in the future. There are two ways for these contracts to be paid for. One way is through transferring the good itself, or by using cash. The buyer either predicts the price to be higher or lower at the termination of the contract while the exchange takes the opposite position. The contract benefits who predicted the price more accurately.

This contracts are not settled in Bitcoin. Instead they are settled using cash which means that no Bitcoin is exchanged with these contracts. Theoretically, this means that no new money is actually entering the Bitcoin Market. So since no new money is entering the market, you may be wondering how this affects Bitcoin then.

Well, these futures SHOULD reduce price volatility. If this occurs, it would allow for Bitcoin to become an actual currency with the increased stability. Right now, Bitcoin is not a viable currency because because of the slow transaction times, high fees and volatility. Transaction times and high fees are a whole other conversation but deserve just as much attention. However, i will only discuss the volatility of Bitcoin right now.

Bitcoin currently cannot be used as a currency because of its volatility. If i was to buy a car using Bitcoin, the amount of Bitcoin i buy it for could be a less dollar amount minutes after the purchase is complete. This is why sellers are generally skeptical about accepting Bitcoin as a payment.

However, due to this process of what the contracts do, this can cause manipulation by WHALES. Whales can enter in into these contracts and say “the price will be ———higher at the end of this contract”. But if it doesn’t reach this price near the end of the contract, whales can buy up a bunch of bitcoin and drive the price up to reach their prediction. This makes them money from the contract itself and then they also have bitcoin that they can sell off at a higher price than they bought, which makes them money there too. The opposite can also be true where a whale predicts the price to be lower in a contract and then sell off a bunch of bitcoin to meet that prediction.

The first of these contracts with both exchanges expire in mid-January so look for price jumps and large drops leading up to the deadlines and shortly afterwards. Stay informed on what these contracts are doing so you dont get burned if the price is manipulated.

If this integration of the futures by these exchanges proves to be successful, then we could see a new era for Bitcoin where it starts to become acknowledged as a serious alternative currency and used as a viable currency worldwide. This is the first test, and if it passes, we could see many more exchanges showing up in the Bitcoin Market. Let’s hope for good things in the future and see where this leads us.

Happy investing. We’re all on this roller coaster together