Bitcoin futures contracts began trading on the Chicago Board Options Exchange (CBOE), on Sunday, Dec. 10.
The Chicago Mercantile Exchange (CME) will launch bitcoin futures contracts today, Dec 18. The availability of futures contracts for crypto-currencies will allow traders to hedge and short bitcoin positions, as well as take on long positions using the leverage that a futures contract allows.
There are also options contracts available on bitcoin from Cantor Fitzgerald and LedgerX, a new options exchange. Futures and options are also known as derivatives; their trading carries substantial risk and is certainly not suitable for all investors.
The rise of crypto-currencies has been an interesting development in the financial markets. Today, there are about 1,300 crypto-currencies in circulation. Bitcoin has been around since 2009, and its growth has been remarkable.
Bitcoin was created so there would be a currency in circulation that was not controlled by the central banks or governments. The price of bitcoin has risen dramatically recently. One bitcoin topped out at over $17,000 U.S. dollars last week.
The price of bitcoin has also been highly volatile lately. It took bitcoin 1,789 days to reach $1,000 dollars, but has been making $1,000 gains in a matter of hours in recent trading. It has risen more than 1,500 percent this year alone.
The futures contracts will be cash settled, so it won’t be necessary to deliver bitcoin for settlement. Most traders don’t hold their futures until the expiration date anyway, but they will be settled in U.S. dollars for convenience. The buyer of a futures contract is obligated to purchase the underlying asset at the expiration date, and the seller of the contract is required to deliver the goods.
For example, if a farmer is planting a crop of wheat for a fall harvest, she may wish to hedge her crop against a price decline in the fall. She could sell a futures contract and lock in a price to protect her crop against a price drop, but she’s obligated to deliver the wheat at the contract price.
Some people say bitcoin is in a bubble and others say that crypto-currencies are here to stay and are the future trend. We’ll have to wait and see what happens. Derivatives trading on bitcoin will make the market more liquid and easier for institutional investors to participate in. Trading in these new contracts may take some time to catch on.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
