During the past decade, cryptocurrencies, including (and perhaps especially) Bitcoin, have really evolved. As it was steadily gaining popularity, there were even ideas that Bitcoin could eventually replace the conventional fiat currency.
The growing hype around the cryptocurrency quickly led to a bubble in early 2018. The bubble then burst and led to a drastic Bitcoin devaluation. The causes for this were government suppression, unclear regulations and, most of all, confusion around Bitcoin’s actual value and its determination.
Nevertheless, cryptocurrencies are still only at the beginning of their evolution. There are over 1000 cryptocurrencies in the world today. Chances are we might see some of them regain their popularity and enter the mainstream once again in a matter of years.
We can boil down the main issues surrounding cryptocurrencies to two questions:
- Can we consider cryptocurrency an exchange medium?
- Can cryptocurrency store value?
Their main quality — the decentralized blockchain model — is both the biggest advantage of cryptocurrencies and their biggest eyebrow-raiser. Lack of a single entity that would control these currency alternatives led to a government crackdown.
Cryptocurrency supporters, however, found optimism in the development of Bitcoin futures. These could result in the creation of other financial products.
History of Bitcoin Futures
Bitcoin futures are a novelty. Their trading started only at the end of 2017 when the Chicago Mercantile Exchange (CME) Group initiated the first Bitcoin future contract.
The hype around them was so great that the CBOE website once crashed due to too much traffic. Also, trading was even ceased at one time, because their value rose by 10%.
The main reason behind such a wide acceptance of the futures lies in the fact that it gives traders an opportunity to get involved with cryptocurrency trading legitimately. Before the arrival of futures, traders had to buy Bitcoin directly, which carried certain legal and tax risks.
Bitcoin Futures — Definition
Just like in other domains, Bitcoin futures are derivatives that follow the price of the underlying security. In this case — the Bitcoin.
They allow traders to buy or sell, getting very close to trading actual Bitcoins. Bitcoin owners can, most of the time, use futures to hedge their positions.
The Bitcoin Reference Rate (BRR)
Since pricing has proven to be one the of main obstacles for Bitcoin futures, the price was standardized in late 2016. And Crypto Facilities and CME Group have since then been using the BRR, or the Bitcoin Reference Rate. Its calculation is not simple. The BRR considers all Bitcoin trades performed in the period between 3 and 4 p.m. London time, in USD, in the participating exchanges. It then divides them into intervals of five minutes. For each of those, it then determines the volume-weighted average price.
Aside from the BRR, the Bitcoin Real-Time Index (BRTI) tracks the Bitcoin price in actual time and provides a more precise price measurement than the BRR.
The purpose of the BRTI, however, is only to track the prices, while the BRR is considered when a position is being initiated.
Bitcoin Futures Contract
Bitcoin futures do not allow a physical Bitcoin purchase. Upon expiration of a Bitcoin futures contract, the compensation amounts to the difference between the closing price and the Bitcoin Reference Rate. This is then compensated for in U.S. dollars.
As is the case with other futures contracts, Bitcoin futures possess a minimum tick size, and it is 5 USD per BTC. As the lowest contract size is 5 contracts, the lowest tick size comes to 25 USD.
We should also point out that the last Friday prior to the expiration of a futures contract is the last trading day.
Risks of Bitcoin Futures Trading
Due to their volatility, trading cryptocurrencies is risky. There are, however, measures one can take to minimize this risk.
A good place to start would be to have adequate capital as protection in the event of drastic changes.
Additionally, algorithmic and automated trading strategies can prove to be quite successful when it comes to Bitcoin futures.
So, What Next?
We can only speculate about the future of cryptocurrencies. While some believe that it might one day even replace the fiat currency, it is also true that there is quite a bit of resistance from the central bank and government authorities.
In any case, at this moment, Bitcoin futures provide a more secure option for traders residing in the United States. They also allow them to make a profit more easily