Bitcoin micro futures for small investors. Affordable to invest in cryptos but beware of risk
After some time studying it, I would like to share with you my opinion on this subject and I would love to know your opinion! I will try to translate to Korean in the best way possible at the end of the post.
For some years now there have been several forms of investment in the crypto-market beyond the direct purchase of cryptocurrencies in any of the exchanges of this technical-financial ecosystem.
From ETFs, to derivatives, to shares of the exchanges themselves that have already made their IPO, the options today are multiple, and have been emerging in the heat of a demand and popularity that is gradually gaining followers, although the promised mass adoption and being able to pay with Bitcoins (or those that crypto-currencies) in any trade is still far away.
But now the market has seen the birth of a new type of Bitcoin investment avenue, and this time it is not only suitable, but specifically targeted at the more modest investors: those small investors, so irrelevant individually, but so powerful in aggregate. Thus micro-futures, or "mini" futures in national nomenclature, have arrived on the market to make this type of derivative accessible to investors with less investment capacity. Of course, they also have their (great) risks.
It has been a few years since the thesis that analysts such as the undersigned so many exposed, warning repeatedly actively and passively that the crypto-market was immersed in a colossal bubble proved to be true. We never claimed from here that Bitcoin could not continue to rise. In fact, we always exposed to those aggressive "bubblers" (they always exist in this type of process) that this was the very definition of a bubble: rising like foam until it stopped doing so, and went on to plunge off the cliff.
And (and in quite a few cases much more), with a textbook bubble that far exceeded the Spanish real estate bubble itself or the historical Dutch tulip bubble, and with a digestion that took several years before the crypto-economy took off again with significant revaluations, something that has only started to happen just a few months ago. For the greediest, let me remind you once again that, in this kind of feverish processes, only a (very) few win, who either have massive manipulation mechanisms such as that strong hand that controls the crypto-market and moves it at will, or else they hit the lottery of having come out by (almost or almost no) chance at the peak of the bubble.
For the vast majority of the rest of investors, the future is simply to make losses if they need the money (a big mistake to invest in volatile assets with money that they need), or to hold their positions to see if in the future the asset takes flight again and they recover all or part of what they have lost. Fortunately for them (and for some others ;) ), this is how it ended up in the case of Bitcoin and part of its listed crypto-compartment. And from there the market continued upwards to $60,000/BTC like a real sidereal rocket, and is now digesting the preceding voluptuous rise. And let it be clear that, without taking away its piornero merit, here we are not so much of Bitcoin as of other very interesting crypto-market alternatives that offer much more both functionally and for its technical-economic ecosystem.
A couple of years ago many crypto-disappointed people effusively predicted that with Bitcoin derivatives, which at that time were about to start trading, would come a new and definitive stretch in Bitcoin's climb, which would take it like a rocket to well over $50,000/BTC. That never really happened, and the Bitcoin before the crash did not go beyond the $20,000 mark. Although it is true that, after the "bubble" digestion that took several years, the famous Bitcoin has come to exceed that iconic barrier widely, and despite the recent correction to around 30,000, the cryptocurrency par excellence came to trade above $ 60,000 / BTC. But well, regarding today's topic, this was neither at the time when Bitcoin futures became traded in the markets, nor was it due to the existence of a derivative.
There was a time when any news about Bitcoin was speculatively and effusively interpreted as a new reason to "get rich" without limit and without giving "a stick to the water" beyond keeping some cryptocurrencies in portfolio. The price of Bitcoin futures was far from being an exception.
Well, that was the textbook bubble that we have described so many times. As you can also see, this Bitcoin crypto-bubble rhetoric has now completely disappeared from our most recent analyses, and not because it could not be happening again, but simply because I do not see enough evidence to be able to state unequivocally that there is another Bitcoin bubble. The thing is not about stocks, but about indications and evidence that right now are not incontestable. But we must not forget that the Bitcoin bubble was a modern demonstration of how the most popular capitalism may have its great dangers for the stability of the whole system, something that is particularly relevant today with the advent of social networks, and with the new capacity for massive manipulation that retail investors now also have, as we saw with Gamestop or with the crypto Dogecoin. Indeed, in the heat of the latest manipulations 2.0, maybe even the initiating crypto bubble of Bitcoin entered even much more in the pattern of a classic bubble. The world changes at breakneck speed, and the crypto-market is its busiest acceleration track.
But today's news is no longer those futures already trading for some years on the Chicago derivatives market, the CBOT or Chicago Board of Trade.
That is now water under the bridge, although it deserved to be analyzed in today's analysis test tube before introducing the new ingredient of chemical-qualitative analysis. The fact is that these Bitcoin futures were quite highly leveraged for the average or retail investor's usual capital. They were the futures for "majors", the kind that only have a place and whose level of exposure only makes sense to hedge (or speculate with) large investment portfolios. Indeed, those large-cap futures were not within the reach of a Main Street citizen, but were aimed directly at Wall Street.
But that is precisely what has changed now. And the fact is that, after several years trading with more pain than glory at first, and with new energy more recently, the novelty now is that the so-called "micro-futures" on Bitcoin, or what in BME is known as "mini" futures, have also been released for trading in the Anglo-Saxon market. These futures have existed on the Ibex for decades, and allow trading with derivative contracts in a 1/10 proportion on the "major" future and its corresponding level of leverage on the underlying, in this case Bitcoin. That fraction in exposure now makes this derivative product suitable for hedging retail portfolios, since don't forget that the most innate purpose of a derivative is to allow you to hedge the exposure of the corresponding underlying (I was telling you that it is a good thing in essence). So, you may have for example 0.5 Bitcoins valued at $15,000 in your portfolio, and you do not want to sell it for example in order not to realize profits with the consequent tax impact on the next income tax return, and then you opt to hedge your portfolio by selling a few mini futures on Bitcoin.
Basically, trading a future is the crossing of one of those derivative trading operations on an underlying at a spot price from which at maturity the difference between that price traded in the contract and the actual price at that time of the underlying, in this case Bitcoin, will be settled. But there is no need to wait until maturity to win (or lose) with our mini future, these derivatives are permanently quoted in the market, and at any time you can cross the opposite position to the one you executed to enter, selling if you entered buying (bullish) or buying if you entered selling (bearish), thus closing your positions and being already without open contracts and without exposure, and thus recovering in liquidity the amount of your guarantees provided to cover the possible overdraft in case your futures contract went wrong. Similarly, you may reach the expiration date, and you may still have expectations that, although for the moment it has not happened, that in a few more days your contract will be right with the trend of the underlying Bitcoin and so you will have capital gains, for which, since the expiration is exceeded, to maintain your open positions you will have to "roll" your position to the next expiration. This simply involves automating, assuming logically the corresponding spread of price difference between one maturity and the next, the buy-sell of the expiring derivative, and the sell-buy of the new one with a later extended maturity.
Remember that a future is not like an option, in which there is an issuer who sells in exchange for a premium a put (bearish position) or call (bullish) option. On the contrary, as an investor, in the futures market your exposure is not limited to a premium that you pay to the writer for opening a bullish or bearish position, but you can interchangeably either sell a future (bearish position) or buy it (bullish position), and you will have to put money paid to your counterparty as long as the trend insists on going against you.
Unless you eat your liquidity and part of your collateral, and then the market automatically closes your positions to avoid the risk of default. That is an extreme of collateral enforcement that is normally automatic and possible under normal market conditions, but becomes dangerously uncertain when there is no liquidity, running the risk of blowing up the derivatives quotation system. And it is in this "pay without limit while you lose because the market takes the opposite" where the great great great great risk of derivatives lies, especially when they are used purely as a tool for speculation and there are not even some underlying Bitcoins to serve as an asset with which to cover the losses: if it is for pure speculation, it will be necessary to have the necessary liquidity to face the market setback.
If there is no way to close out positions that run out of collateral, there is no way to guarantee the fulfillment of a contract in which you are obliged to pay whatever the Bitcoin goes down or up against your position, and which you may not be able to cope with once you no longer have sufficient collateral deposited. Do not think that this is an impossible situation, despite being all Armageddon in the derivatives markets, it is something that for example we already saw during the peripheral sovereign debt crisis in Europe in the days before Draghi's famous "whatever it takes". That was not really a warning, but rather a desperate flight forward as a battle cry to frighten the enemy, despite knowing that it was not strong enough to counteract investors who had left the market completely dry.
But now that micro-futures are among us and within reach of our common readers, it is appropriate to continue to make some warnings about what derivatives trading is, and about its most dangerous risks.
Apart from the possibility of not finding counterparty because the markets are dry, apart from the execution of collateral, apart from the level of leverage, another of the great dangers of the derivatives market is what some traders and in some trading desks is known as "continuous re-leverage".
I am only explaining this market operation to you so that you can see in first person its great risks, and so that you learn and do not even think of falling prey to your own ambition by executing this type of wild speculation that can have such dire consequences for your family's wealth. When one enters the market, the optimism and/or the arrogance of some natures makes them believe that they are only going to win, but often an investment is a thorny path, even when the final result is a longed-for capital gain. Thus, in the stock market and even more so in derivatives, one must be prepared to be able to deal with the worst case scenario, and never play gambling with money you borrow, money you don't have, or money you need. Violating any of these three maxims is like going to the casino and betting it all on red, especially when sometimes the roulette wheel of the markets is totally rigged in the short term.
But this "continuous re-leveraging" operation is based on the fact that one opens some positions, which let's say they are "short" or bearish and we have sold some mini futures contracts, and the market agrees with us and starts to go down significantly. At that moment, the simplicity of a futures contract means that as long as the market goes down, our counterparty is obliged to pay us all the difference in the quoted price of the future. That is to say, as the price of the derivative falls, the euros accumulate in our account as a result of having been right with our bearish position. And that is where the greed of some, seeing a liquidity in account that can become very important, makes them think that they can redouble their bearish bet, or even turn and close the put to suddenly move to the opposite sign opening now bullish positions, but doing it on a greater number of contracts, since with the liquidity gained from the previous success one can afford to pay the guarantees of more futures contracts, open more positions and ... take a risk and have a much greater exposure.
This obviously works very well as long as the market is right, but as our risk has been increasing as much as our unconsciousness, the moment the market gives us a setback (and this always happens), the cake is the product of a "continuous re-leveraging" that has made that cake a sovereign cake by which our collateral is executed, we lose a good part of it, and we are thrown out of the market until we reestablish the level of that collateral. It goes without saying that in this case we will lose a very important part of our initial investment, which after all are the guarantees immobilized by BME while the contract is open, but at a multiplier that corresponds to the level of leverage we had after the disastrous speculative dynamics of "continuous re-leveraging": that is to say, that recovering the initial capital becomes doubly difficult with collateral to which the setback has given them a good bite, and which now allow us to open far fewer contracts, so that we must get the market trend right for much longer. Well, a dead end that normally only leads to more losses, and to losing almost all the guarantees.
But however alarmed you may be if you are a non-speculative investor, however much you may have been shocked by this analysis (as was your objective), however aware you may be that the market must be looked after by everyone... do not fall into demonizing per se derivative contracts as the origin of all evils. The source of all evils is not the derivatives markets, but certain types of self-styled investors who swarm here and there in every market. We also see them scraping money in the stock or commodities markets at the expense of other people's pockets and with strategies that are no more than chicanery, but which sometimes unfortunately pay off (and their euros). Unfortunately that has been happening for as long as mankind has had assets as a repository of value, and it will continue to happen in one way or another, just as as as long as there is a stone on this planet any other human can come along and use it to throw it at your head. But perhaps you have made the mistake of attributing all speculation to the nature of a derivative, doubly perverse if on top of that it is a speculative Bitcoin that is the underlying. To try to make you see the good side of derivatives (which they also have) I will give you a very simple example, in this case with options instead of futures.
Imagine you are a farmer growing lemons, and you forecast a bad harvest because it gives you that it is not going to rain enough. The forecasts are not aligned with your vision, and so in the wholesale markets right now the kilo of lemons is selling for 0.80€/kg. If you could, you would sell your entire crop of lemons right now without thinking, but you can't because they are still on the tree and not even ripe. So what you can do is to buy a put option that, for the payment of a premium, will allow you to sell your crop of lemons at an expiration date at a spot price that will be very close to the current 0.80€ of the underlying (lemons) in the market.
Do you see how useful derivatives are conceived to benefit the real economy? Well that, now as I was saying, despite that certain beneficial nature, another human can also arrive at any time and throw a futures contract at your head. But without its more "popular" surname the essence and promises of capitalism really lose their more native meaning, so that despite the speculation, despite the risk, despite the manipulation, despite all this, there is still an important part of the market that in practice is a good and beneficial investment for the whole of the Socioeconomy. This is the part of the investment that contributes to correct price formation, that greases the markets, that provides a means of financing for companies and that... also gives citizens the possibility of owning a small part of an important listed company, like the small shareholders they can be for a handful of dollars or euros. Let us not make the mistake of forgetting that market mechanisms can become perverted (also now by retailers), but that these mechanisms are there for something, and above all that they have their beneficial economic-business function. Everything in this economic world, as in the technological one by the way, are tools that are neither good nor bad per se, but depend on how then certain human natures make use of them. Yes, even derivatives, and even also derivatives whose underlying is Bitcoin, which now with mini contracts are within your reach as a retail investor. And if you trade them, just let me paraphrase that famous line that in the series "Sad Song of Hill Street" the sheriff would say to his boys every morning after the "briefing" before they went out on patrol: "Oh, and be careful out there."
I hope you enjoyed it! 😉