With a big bang, the Chicago Board Options Exchange (CBOE) recently announced the launch of bitcoin futures on Sunday, 10th December. Considering that the Chicago Merchantile Exchange (CME) planned to reply with a delay of only about one week, questions were mounting about the impact of the future on bitcoin prices and whether there are alternatives to these derivatives. But what are futures all about? What is their purpose?
A short introduction to futures
Technically, futures are a bilateral agreement to buy or sell a certain product at a certain date, overseen by a regulator, namely the Commodities Futures and Trade Commission.
Whilst the prevailing opinion is that futures are used for the sole purpose of speculation, suchlike derivatives have a deeper meaning. Futures open the possibility to control risk in a portfolio, commonly referred to as ‘hedging’. This is even more the case for highly volatile underlyings such as bitcoin. So much for the theory.
How will Bitcoin futures actually affect prices?
To answer this questions, one has to take a closer look on the actual future contact. The CBOE currently lists three Bitcoin futures, with the final settlement value of the contracts determined by the price of bitcoin exchange Gemini via Cash (‘Cash Settlement’). A future without physical delivery surely cannot have a direct impact on the underlying.
However, giving the ‘big money’ such as institutions and bitcoin billionaires the opportunity to hedge against potential price declines, i.e. going short a bitcoin future, makes it much more likely that significant stakeholders stick to their positions and new investors consider becoming bitcoin investors. This puts the scenario slightly in favor for long-positioned market participants — not to mention further promising indirect effects such as lower overall volatility, higher trading volume and, hence, lower spreads. Again, this is only one part of the story.
So far, shorting is difficult
As the first bitcoin future finally experienced its launch, it became clear that the market is still in a development phase. Whilst bitcoin future long positions require a decent amount of margin (roughly 50%), short positions are not provided by many brokers or only under very high margins. But there is even more to the story. Bitcoin futures are only provided short term (1-month, 2-month and 3-month expiration) and, consequently, require constant rolling in deferred contracts, which makes hedging probably more difficult than most participants expect. Also, Bitcoin futures lead to a payout in US-Dollars, which may not be the currency of first choice for the most participants (the whole story was about hedging Bitcoin). Not to mention the fairly high margin of up to 50% in order to hedge the core position, thus, unnecessarily locking up significant amounts of capital. This clearly puts the promising pro-future arguments in a different perspective.
The alternative: Natural hedging via asset-backed solutions
An alternative way of dealing with the problem of high volatility and large trading positions, though commonly used in the ‘traditional capital markets’, has always been and still is to use capital gains to acquire uncorrelated, low volatile assets (‘Safe havens’). Options which meet those criteria are rare if you search by using a risk-return consideration, but are easy to find in everyday life: real estate.
Real estate offers low volatility yet high return potential and is one of the very rare asset classes in which objects at hand are accepted as collateral to finance itself. In other words, an inflation protected asset class can be financed by an effective short position in FIAT money. This means, investors could profit from inflation, invest in inflation-protected real estate and still gain exposure to cryptocurencies. Furthermore, this real estate-backed solution with measurable and proven intrinsic value can be invested in by using cryptocurrencies without the need of a previous change in Euro or US-Dollars.
BITREAL Capital currently provides its investors this option by launching the first fully regulated closed-end fund in Germany and probably worldwide. The fund enables investors to profit from both high-rated German real estate and the opportunities of cryptocurrencies, while strictly limiting the downside of the Crypto-Position (similar to the CPPI-approach; Constant Proportion Portfolio Insurance). Investments are possible both via Euro or major cryptocurrencies.