Bitcoin futures trading: What it is and should you be investing?
Bitcoin is, seemingly, the cryptocurrency that can do no wrong. Despite high-profile hacks resulting in millions of dollars of losses, and an eternally fluctuating value, moneymakers love Bitcoin.
This weekend, the value of Bitcoin soared once again, and this time it was all because it finally started trading on a major exchange. Instead of being relegated to the confines of the internet and questionable Bitcoin and cryptocurrency exchanges around the world, Bitcoin has now found its way to the CBOE futures exchange in Chicago.
By joining the CBOE, many feel that the decentralised cryptocurrency has finally found legitimacy. Allowing people to invest and trade on the future potential of Bitcoin means the CBOE views it in a way that’s just as important as the US Dollar or even the British Pound.
But what exactly is futures trading, and is it sensible to invest in it with such a volatile currency?
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Bitcoin futures trading: What is futures trading?
Futures trading is a form of something called a “forward contract”. In finance, these forward contracts are a non-standardised contract between two parties to buy or sell an asset at a specified future time at a price agreed upon today.
The difference between a futures contract and a forward contract is that instead of being non-standardised, a futures is standardised. This means you’re legally agreeing to buy or sell an asset, commodity or financial instrument at a predetermined price at a specified time.
Generally, futures are an attractive proposition because they help mitigate risk in industries that have a reasonable degree of uncertainty. Usually this means many futures contracts are in relation to agriculture as it allows for trading to be done across currencies without worrying about individual currency price fluctuations to occur. Understandably, it also lends itself well to something as volatile as Bitcoin.
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Bitcoin futures trading: What does this mean for Bitcoin?
In the short term, by opening Bitcoin to futures trading, the value of one bitcoin has shot up. Overnight it rose by 17% to break through the $18,000 (£13,500) ceiling. Currently, the value of one bitcoin sits at around just south of $17,000 (£12,700) according to Coindesk.
A lot of people believe that now Bitcoin has entered the futures trading market, it’s a legitimate currency for trading. However, there’s a lot to still be cautious about. Speaking to the Today programme, chief investment officer at St James’ Place Chris Ralph stated that it’s worth remaining cautious about Bitcoin.
“I refuse to use the word legitimate, but it’s probably moved out of the shadows into the open,” he said.
“But what I think it means is more people in the conventional investment banking market will take a look at Bitcoin.”
Speaking on CNN, CNN Money correspondent Paul R. La Monica expressed his concerns saying, “You have all of this fervour around Bitcoin because the price continues to go higher… and I think that’s attracted a lot of average investors who think ‘hey the stock market is doing okay, but I can’t make money that quickly off a company like Apple or Google, so why not throw money into Bitcoin?’
“Of course that’s incredibly risky but, the more that the price goes up, more people don’t think the price will go down. We’ve lived through bubbles like that before and they don’t often end well”.
By opening Bitcoin to futures trading, investors can speculate on the value of the cryptocurrency without actually owning any bitcoin. This means they aren’t actually buying and selling off their own currency, simply betting on how much its value will increase or decrease.
Essentially, by opening it to futures, Bitcoin owners could see the value of their own investments plummet because somebody decided they don’t think it’s worth quite as much as it first appears.
Canada’s CBOE has stated that any trading on Bitcoin will be suspended if the price rises or falls by 10%. This is intended to help reduce wild fluctuations in Bitcoin’s value. Interestingly, the Futures Industry Association has criticised the US Commodities and Futures Trading Commission’s support of the CBOE, stating that not enough attention has been paid to the risks involved with Bitcoin trading.