Bitcoin Futures Trading: Unchartered Waters?

A few weeks ago, the bitcoin world was rattled by uncertainties over a potential negative impact of Segwit2x hard fork on bitcoin’s future. That chapter was gratefully brought to a close with the announcement that the hard fork had been cancelled over lack of consensus.

Then came CME Group’s announcement that it will launch bitcoin for the first time on its exchange from December 18, 2017. It was greeted with significant optimism – another exciting news added to the surging value of the virtual currency. Finally a global exchange was going to confer legitimacy on the world’s number virtual currency.

No sooner had the network begun celebrations comes the news from Chicago Board Options Exchange (CBOE) that it was leaping ahead of CME to launch bitcoin on its platform. The futures product will go live from 5 p.m. Central Time on December 10 under the ticker symbol “XBT”.

CBOE’s entry also has great potential for bitcoin’s future.

According to experts, traders stand to benefit as it will bring greater transparency, efficient price discovery, deep liquidity and centralised clearing. XBT futures provides a centralised marketplace for participants to trade based on their view of bitcoin prices, gain exposure to bitcoin prices or hedge their existing bitcoin positions.

New York based, Nasdaq is also expected to enter the bitcoin futures race in the first half of 2018.

The entry of these big three exchanges according to experts could make a bitcoin ETF possible. A bitcoin ETF also known as bitcoin exchange traded fund gives individual investors an opportunity to invest over the long-term in bitcoins without the need to buy the bitcoins directly. It also eliminates the hassles of managing digital wallets. Short term traders can bet their money on short-term price moves of bitcoin ETF units and attempt to benefit from trading profits.

There are risks factors to consider if the US Securities and Exchange Commission (SEC) grant new bids to launch it. In meantime, issues around short positions have been raised regarding the bitcoin futures trading.

Taking short positions could be profitable of dangerous for the market but it all depend on which side of the street an investor finds his or herself.

To explain short positions we asked Tim Akinbo of Tanjalo.com, a Nigerian-based bitcoin exchange. This is what he has to say, “When someone buys something with the belief that it would go up in value and they would make a profit, it is called a long position. On some markets, you can borrow an asset and sell it with the intention to buy it back at a lower price because you believe the price will go down – this is a short position.”

For example, if one took N100 and bought a share of a bank with the belief that it would go up in value. The person would have taken a long position. To make a profit, the price has to go higher than N100.

“If instead, you do not believe the bank will go up in value but rather it would go down, you can borrow the stock and sell it for N100. You intend that when it drops in price, you can buy it back and pocket the change as profit. This is called shorting. The price has to go below N100 for you to make a profit,” Akinbo said.

Apart from short positions, there is also the issue of whether bitcoin trading futures is the answer to the high volatility the market is notorious for.

CME and CBOE seem confident that their activities can bring some form of stability. CME said it will be using price limits that kick in during or losses of 7 percent, 13 percent that would slow and in some cases halt trading. In particular, prices will not be allowed to move up or down more than 20 percent from the prior day’s close. If that limit is hit, trading can only continue at or within the +/-20 percent limit for the remainder of the trading session.

 Would that rein bitcoin? We may not know until the beginning of trading on these exchanges.

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