Cboe Global Markets, the Chicago-based exchange group, will be the first exchange to launch bitcoin futures. And you can be sure Wall Street will be watching. CME Group, Cboe’s cross-town rival, will launch its market later in December. And Nasdaq is preparing for a launch for the second-half of 2018.
The new product by Cboe will allow investors to bet on the future price of bitcoin, which skyrocketed to an all-time high above $17,000 on Thursday, according to data from Markets Insider. Many people think bitcoin futures, if they go well, will open the door to wider participation in the bitcoin markets by Wall Street firms and retail investors.
Cboe President Chris Concannon has already hinted other cryptocurrency futures might be on the horizon.
We’ve answered some of the questions you might be asking yourself about bitcoin futures.
What is a future?
A future is a type of financial product, which allow two parties to exchange an asset at a specified price at an agreed upon date in the future. They’ve been around since the late 19th century. They are traditionally traded by professional investors and firms. There are futures based on everything from oil to corn. In some cases, when a futures contract settles the buyer of the contract can receive their payment in the product itself (a barrel of oil, say), or in cash. The latter are referred to as cash settled futures.
How do Cboe’s bitcoin futures work?
Cboe’s bitcoin futures, which are set to launch at 5:00 p.m. CT, will allow investors to bet on the future price of the red-hot coin. The product will trade under the ticker XBT. Cboe will be waiving all transaction fees for bitcoin futures until the end of December. The futures will settle in cash, not the underlying cryptocurrency itself. That means traders can speculate on the coin without actually having to touch it.
Cboe is basing its futures on the pricing of Gemini’s exchange, which was founding by the famous Winklevoss twins.
Traders will have to put some money on the table for their bets. Since bitcoin is so volatile, traders of Cboe bitcoin futures are required to have 44% of the bitcoin settlement price set aside for their bet. So-called margins are typical for futures, but are under 10% for the most part. Think of them as a down-payment for risk. VIX margins, however, can get up to 50% because they can sometimes have a high risk profile.
Can I short bitcoin now?
Yes. If a trader bets the price will go up and if the price of bitcoin is higher at the point of the contract’s expiration, then they profit. At the same time, if a trader bets the price will go down and it does, then they’ll get paid from folks on the other side of the bet. Cboe’s expiration date for the contracts being sold Sunday is January 17.
How do I buy a bitcoin futures contract?
Retail investors can buy futures contract through their broker. But only a few firms are seriously thinking about unleashing bitcoin futures just yet. TD Ameritrade, one of the largest online brokers, is taking a “wait and see” approach and won’t provide the product for clients until they think the market is ready. It looks like folks with Charles Schwab, Fidelity, and Etrade accounts won’t be able to buy the product, at least in the short term. Ally Financial, according to Bloomberg, will let users buy bitcoin futures.
As far as the big banks are concerned, many have said they won’t clear trades for bitcoin futures. JPMorgan and Citigroup, which are two of the largest futures brokers, will not participate in the market Sunday. Nor will Societe Generale. Interactive Brokers and Wedbush will participate, according to reporting by the Financial Times.
Goldman Sachs will clear futures for some clients.
Day one trading is going to be comprised mostly of the customers who have been begging for bitcoin futures, according to person familiar with Cboe’s bitcoin futures. These are likely to be the investors who’ve been trading bitcoin itself.
Why are people excited about bitcoin futures?
There are a number of reasons why bitcoin futures products are a big deal for Wall Street and the world of crypto. First, the launch of bitcoin futures by establishment firms is likely to to open the door to wider participation in bitcoin trading by other Wall Street firms. It could also pave the wave for an exchange-traded fund, which could bring more investments into the space. Most importantly, it could help dampen bitcoin’s spine-tingling volatility.
What are some of the concerns about bitcoin futures?
Some people don’t think the underlying bitcoin market is mature enough for a futures market. The market is unstable with bitcoin exchanges under pressure and printing wildly different prices when trading volumes spike. Hacks and security problems are also widespread. Critics think that instability in bitcoin could spread to other corners of the futures markets.