BTC futures is a financial WMD

There's been a lot of excitement from many folks about the upcoming availability of CME futures contracts for Bitcoin. I have mixed feelings about this development and here's why.

Futures = Financial weapon of mass destruction

Futures are basically financial weapons of mass destruction. They can be used for good as well as bad (Depending on which side of the fence you stand on). They can be used to pump up prices or conversely to drive down prices. The magnifying power of futures contracts can allow those who have the wherewithal to do do so, to manipulate prices in an unprecedented way in the crypto market in their favor.

Bitcoins not required

The type of futures that CME will be offering with Bitcoin are known as cash-settled contracts, which means at the end of a contract period, no bitcoins are actually exchanged. Instead buyers/sellers of contracts will just pay cash to settle their positions. Buying or selling of BTC is not required by anybody participating in these deals. These contracts can be funded in anyway the customers wish as long as they can stump up the cash to settle at the end. Isn't this totally like spread betting?

The big danger with financial instruments of this type if the huge leverage or gearing that you can access through it. This makes them extremely lucrative if used correctly and also extremely dangerous in the wrong hands, or if you are standing on the wrong side of a massive bet. If you think current whale dumps on cryptos are pretty big, futures contracts could bring pumps (and dumps) to a new and previously unheard of level.

The price of bitcoin for these contracts is based on what's called the CME Bitcoin Reference Rate (BRR) which is a daily calculated price based on data from several major exchanges. The following infographic has a bit more information on it.

Have futures = will do great?

Will these futures contracts have a major positive impact on BTC price? Consider this for a moment about the performance of various investment classes. Which of the investments below is the top performer since 2009?

• Commodities
• Fiat currencies (Forex)
• Shares/Stocks
• Bonds
• Bitcoin
• Real estate

Hmmm... tough question there? Answer of course is Bitcoin.

What does all the other investment types have in common that Bitcoin does not have yet?

OK, not a difficult question, answer is you can purchase futures contracts for all of them except Bitcoin - that is until now. Is it a coincidence that BTC with no such financial instruments available during this time, has outperformed them all?

What does the futures hold?

People need to be careful what they wish for. Personally I fear that with the advent of BTC futures and later futures for other cryptos will have a negative impact on BTC's meteoric rise and put a real dampener on things, but I hope I'm wrong about that.

How much impact these futures contracts will have on the real price of BTC will remain to be seen. It will be interesting times ahead. Let's see how this one pans out in the coming months.

Thanks for reading

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