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Bitcoin Futures: the Potential and the Risk

What Bitcoin futures could mean for the crypto economy

Bitcoin Gains Legitimacy

The cryptocurrency’s legitimacy, along with its price, is on the rise. This month, the US Commodity Futures Trading Commission announced that Bitcoin futures have been self-certified by the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME). This announcement was a significant milestone for Bitcoin because these two institutions are trusted pillars within the financial industry.

What is a Futures Contract?

In the case of Bitcoin futures, if an investor believes the price of Bitcoin will be elevated to a certain price in the future, that investor can use this prediction to their advantage. The investor can sign a futures contract for Bitcoin at a lower price than their prediction, then when the price is higher than their futures contract price agreement, they can profit from the price difference.

Futures are appealing to investors for their leverage, meaning investors can trade on multiple Bitcoins while only actually paying for a portion of them. While leverage is a benefit, it can also be dire if played wrong. In the same way that you can amplify your profit potential betting on futures, you can lose a large amount very quickly.

The Benefit: Added Stability

The Risk: Slim But Real

He took out an editorial in the Wall Street Journal recently. In it he spoke of his unease at young currency stating,

“Cryptocurrencies do not have a mature, regulated and tested underlying market,” he said. “The products and their markets have existed for fewer than 10 years and bear little if any relationship to any economic circumstance or reality in the world.”

He has a point, especially regarding how new and unprecedented Bitcoin is in relation to traditional currency and assets like gold and oil.

Bitcoin Price Limits

CME’s limits are as follows:

Price limits for a given Business Day are calculated in relation to a reference price, which generally will be set at the most recent Bitcoin Futures settlement price, calculated at 4:00 p.m. London time each Business Day. The reference price may be adjusted at the sole discretion of the Exchange to incorporate BRR changes on non-trading days. A price limit of 20% above or below the reference price and special price fluctuation limits equal to 7% above or below the reference price and 13% above or below the reference price apply. Trading will not be permitted outside of the 20% range above or below the reference price.

The Future Is (Almost) Here