The Future of Bitcoin & Bitcoin Futures: An Accountants View
How many retail investors understand the futures market?
My guess is not many. The problem is that many Bitcoin holders are very jumpy retail investors.
So we all need to have a basic understanding of what Bitcoin Futures are and what they mean for the price of Bitcoin.
Futures Markets
These are not a new invention, in fact, even in ancient times, people used futures contracts to help with price stability and to reduce risk
"In Ancient Mesopotamia, around 1750 BC, the sixth Babylonian king, Hammurabi, created one of the first legal codes: the Code of Hammurabi. Hammurabi’s Code allowed sales of goods and assets to be delivered for an agreed price, at a future date; required contracts to be in writing and witnessed; and allowed assignment of contracts. The code facilitated the first derivatives, in the form of forward and futures contracts. An active derivatives market existed, with trading carried out at temples." - Wikipedia (https://en.wikipedia.org/wiki/Futures_exchange#Ancient_times)
The aim of a futures contract is to allow a purchaser or a seller to know what price they will execute a trade at a future date and thus removing the worry in regards to price volatility.
They work by having a standard contract for the purchase or sale of an asset at a future date. The price of this contract can vary and will normally converge to the market price as the date of the contract draws near. As the contracts are standardised, you can sell your contract to someone else before the execution date.
For example, a futures contract for oil to be delivered on June 2019 may be priced at $100, while the current market value is $80, therefore the market expects the price to rise over the next year. You can either buy the oil now and hold it until you need it, or buy the futures contract and know that the most you will pay is $100 in a years time. You may be paying more or less than the market price in June 2019, but you have removed all your market price risk.
How Will Futures Contracts Effect Bitcoin?
In theory, the Futures Market should bring more stability to the market as traders can know in advance what price they will be able to trade at in the future, rather than just guessing and hoping.
We can see from this data at the CME Group's Futures Market, what the expectations are for future Bitcoin prices;
As you can see, Bitcoin futures are trending up, with $6,485 in June, $6,540 in July and $6,575 in September (not sure why their August contract doesn't show a price!). The current price of Bitcoin is $6,558.
What does this mean for Bitcoin Hodlers? Well, if you think Bitcoin will fall massively and are worried, you can buy a futures contract to sell your Bitcoin at $6,575 in September, that way even if the market went down to $1,000 - you can sell your Bitcoin for $6,575 at the execution date of the contract. But if the market goes through a bull run, you will miss out on any gains as you will have to fulfil your contract at that price.
What does this mean for Bitcoin as a whole? Generally, having a Futures Market can bring a lot more stability and liquidity into a market. And more importantly, all these futures markets will have to hold some Bitcoin to hedge their positions. Which is good news for the Cryptocurrency Market.
Summary:
Futures Contracts will bring more stability to the Bitcoin price and with that will be more institutional money. Both things are good for the cryptocurrency market in my view. This won't happen overnight and I expect the volatility to continue for a while yet.
Disclaimer:
*This is not financial advice, (unless you want to give me a share of your profits!), your losses are your losses and your gains are your gains! And before all the finance techies come and complain, I am aware I have simplified this and that was the point, to make it a little more understandable *
It's been a while since I have had time to delve back into steem. I want to say a big thank you to everyone who voted on this post and especially @fulltimegeek!
Your votes have not only helped in increasing the post payout, but more importantly improved my reputation score. As unfortunate as it may be, many still look at reputation score as a guide to the authenticity and quality of an author.
Thank you all again, I am humbled by your support.
@kabir88
Wow last time I checked you were on rep 3. Thats fast! But you’re right. Rep does not mean much.
I thought I would stop holding off for my rep to go up and started writing some of those thoughts I really wanted to share. Luckily a few people noticed and gave me a big upvote. Specially @fulltimegeek, who I am very thankful to.
Watch this space, more cool posts coming soon and thank you for your continued support and engagement!
Aaaaaaaaaaaaand it’s gone.
One voice shuts 100s of voices here on steemit this has to be fixed @ned!
Hey congrats on your rep being at 43 now WOOT! Do you know what happened to make it jump back up?
fulltimegeek came to my rescue and upvoted all my recent posts
I am very happy for you you should have a higher rep!
great post, i think most derivatives are not understood by retail investors. also i don't think futures are very useful for retail investors, given limited investor base for bitcoin. something with extremely large adoption, like an index - s&p 500, futures can be beneficial even for retail guys.
as institutional or retail adoption goes up, and different type of buyers come in, vol will come down imo. there will be buyers are different levels and driven by different purposes, as is the case with FX market - speculators, hedgers, businesses doing transactions - there is a buyer at every level and usually large buyers such as the central bank who want to support a currency. hence vol is low. if there were only speculators in fx or stock markets, we would see similar vol there.
anyway, having a derivative market for bitcoin was timed incorrectly i think. first should have been regulation, then a derivative market should have been created. right now, there is a case for bitcoin price manipulation using futures, and traditional exchanges are outside the purview of regulators.
The beauty of a Futures Contract is that it makes Bitcoin useable for large international transactions.
For example, you agree to buy 100 barrels of oil for 1 Bitcoin.
That's great, but what if the price of Bitcoin goes from $6,500 to $100,000 on the payment date?
Now you can use your futures contract to hedge against that risk. You get the security, global reach and low transaction fees of bitcoin, while removing the volatility.
This is why I think the Futures Markets are essential for the growth of Bitcoin.
Yeah, that's hedging. That's what i meant. Right now given low adoption and less use cases, futures havent served a practical purpose other than for speculators to make money. Remittances using bitcoin are still low. Payment in bitcoin also low. Plus retail guys dont have access to futures market easily. I can short a cfd to achieve what you are saying. We need regulation and higher adoption before futures can serve the desired purpose of hedging.
I would have to disagree with that. Futures makes Bitcoin usable for large payments. And if institutions/large corporates can make large payments for close to nothing, they will use more of it, increasing demand.
Yeah i see it differently.
I see your level has gone up.. finally the impact of haejin is gone.
Almost gone, I still see a few flags from him and his other accounts!
I use it as a reminder to go and flag his spam posts ;)
Yeah, i am receiving the flags now. He is wiping out my payouts now. Any suggestions on how best to deal with him?
Is this the first time?
Do you know what you did to upset the #beastofsteemit?
He is too greedy to use his sp to flag everyone. He tends to pick on a few people who he can see as threats.
Act with the community, do not try fight it alone. If he has flagged you, tell everyone.
Follow @flagtarget and flag with the community
It worked... You made it understandable enough for me... Thank you!
Great! That's really nice to hear and it's good encouragement for me to write more!
Thank you
thanks @abbak7 and @enforcer48 for your votes, but you should try and wait until around 30 minutes to improve your curation payouts. Maximise those gains!
I am currently doing some research on curation, hopefully I can post about that soon. It's really complex!!
Congratulations on being back!!!! your're back, I'm back, & Bernie is back... Strange seeing our REPs the way they are right now.
Thanks - it does make life easier on here for others to take your content seriously if you have a decent rep score.
But with or without, it's been nice to see the people who continued to read my content, even when I was scrapping around at -5!