RE: When to Buy Bitcoin Now Post-Crash and Why
A future contract is an "agreement" between two parties that one will buy an asset (be it BTC, gold, or whatever) and other will sell it at the contract established price, no matter what is the price in the future. One of the parties will end up in a loss.
Futures trading contracts like the CBOE one is where a bunch of people buy or sell a contract that have an expiration date.
At the expiration date, the contract is settled, and whoever have the contract in the hand will have to make the settlement (is a bit more complicated than that, but its the basic idea)
When you buy a future contract, you dont buy the asset. Only the agreement that you will buy/sell the asset at the contract price. CBOE futures contract end today, but there is already a new one open.
The price of the future contract is different from the price of the asset (higher or lower) because it is not the asset. It is and price established on by the exchange following specific rules.
Every day, there is an adjustment on the contract price, that puts it closer to the asset price. At the expiration date, the price is the same of the asset, and the contract is settled. A new contract is created, and the cicle restart.
No BTC ever exchanges hands.
The movements on the price is related to the price of the asset, because people trade these contracts based on what price they expect it to be on the future. It is not exactly the same, but they are alike.
Before the expiration date, anyone is free to buy or sell the contract, usually with leverage (less money to buy more contracts, but higher risk) provided by the exchange, wich make it a lot easier to trade on higher volumes. And they can buy a short position, betting on the price falling.
But no trades that happen on the future contract exchange only have effect on the price of THE FUTURE CONTRACT. There is no effect on the price of the asset. NO ASSET CHANGE HANDS.
But here comes the catch...
In a small market with no regulations (in money volume) like cryptos, it is pretty possible for someone with enough cash and intelligence to manipulate the asset market, and have its reflection on the Futures Market.
THERE IS NO DIRECT EFFECT. Only a possibility of market manipulation.
A very large possiblity I would say. If the futures are a leveraged bet, someone heavily short the futures and holding large amounts of BTC would have a large incentive to sell the btc hard to win on the contract and then buy back the BTC lower. With large selling comes stop runs and panic selling so thier selling facilitates much greater selling at certain price points. With computers and algorithyms available to only rich investors, this becomes a pretty doable arbitrage.
Key for small players is, hold your bitcoin through contract expiration dates.
I was thinking this exact thing and made this post right before I read yours:
https://steemit.com/bitcoin/@lordprime/will-the-cboe-s-bitcoin-futures-always-rise-into-the-close-on-expiration-day
I ahve read what they are, but this explanation does not explain why ive observed that several times in January that CBOE have had 3000+ contracts listed as active, and over 1000 CME futures contracts, then later say 1 week after, both was listed at 0-200 contracts. For that same mounth of January.
IF your explanation @phgnomo and what is informed about in the futures websites was 100% true, then that whouldnt happen,. Unles there is a vital detail Im missing.
Could you point me to the website with this information?
cboe futures: http://cfe.cboe.com/cfe-products/xbt-cboe-bitcoin-futures
CME futures: http://www.cmegroup.com/trading/equity-index/us-index/bitcoin.html
Note: CME futures had over 1000 contracts for January earlyer, before cboe futures contracts for january ended.
I am not sure if i understood what you meant, but this is how it goes:
1 Contract = 1 Bitcoin (CBOE)
This means that if one person wants to buy one future contract, he must deposit the equivalent value of 1 Bitcoin on the contract (usually through a broker). The same goes for who want that want to a short (sell) contract.
That way, for every 1 BTC contract, there is 2 contract values on the system.
Each buy (long) contract open up a sell (short) contract. Every contract must have 2 sides. One buying and one selling.
This means that if on day 1, one person buy 10 BTC contracts, there is 10 sell (short contracts) positions avaiable (or active contracts).
If on the next day, that 10 BTC (contracts) owner close 2 contracts ("sell" 2 BTC), there is now 8 active contracts.
The amount of contracts active varies between days. At the end of every day, a settlement happens, where the values relative to the contracts exchange hands:
If someone gained +100, someone else lost -100.
At the expiration date all open contracts are settled, and there is no more open contracts to trade, and everyone recieve back the money they have. Then a new cycle restarts.
No one gets any close to one satoshi. Not even the CME or the CBOE.
Everything is manipulated. Even the stock market. Even the USD market. What isn't manipulated? Even politics are manipulated. The key is to play within the manipulated games.
Can doesnt mean they are.
The difference here is that is lot harder to manipulate Stocks markets due to the very high volume traded and some regulations that punish manipulation.
On the cryptos have low volume and no regulations, so... A few millions is enough to manipulate price.