26 May Now Live: Micro Bitcoin Futures
Capital 19 clients now have access to trade Bitcoin futures through the platform with the new 1/10th sized CME Bitcoin Futures Contract
Traders get to enjoy the same benefits as the larger five-bitcoin contract, at 1/50 of the contract size, settled to the regulated CME CF Bitcoin Reference Rate
The Code to trade these contracts on the platform is BRR
Bitcoin has become very popular in 2021, surging from around US$30,000 to over US$60,000. Many believe virtual currency to be the future of monetary exchange. Bitcoin is by far the most successful currency today. Despite Bitcoin’s recent popularity, there are some serious risks when it comes to investing in cryptocurrency which the CME Futures contract overcomes
Cryptocurrency is technology-based and held in electronic “smart-wallets”. Hacking is a serious risk since there is no way to retrieve your lost or stolen bitcoins. Additionally, some wallets require a key and if you lose this key there is rarely a way to retrieve your coins.
However, by trading the CME Bitcoin Futures contract you have the security of a regulated exchange and custodians tracking your buying and selling and you do not have to worry about losing your access.
- 2. Fraud
In addition to hacking, there is a fair amount of fraud in the bitcoin market. Buyers and sellers are looking to trade bitcoins online, but since their rise in popularity, some of these exchanges can be fake. The Consumer Finance Protection Bureau and the Securities and Exchange Commission have warned against these transactions where unsuspecting investors are duped out of their bitcoins in fraudulent exchanges. This lack of security creates a big risk for investors. While systems have been created to deal with these problems, security remains a big issue.
With the CME Bitcoin Futures, the exchange acts as counterparty and guarantees delivery and settlement of the product.
- Little or no Regulation
Currently, the bitcoin market is operating without any major regulations. The government doesn’t have a clear stance on cryptocurrency; the market is just too new.
The CME Bitcoin Futures is a regulated product and falls under the jurisdiction of the CFTC – Commodity Futures Trading Commission
There are other benefits to trading the CME Bitcoin Futures Contracts as opposed to buying Bitcoin through a smart-wallet.
At the time of writing, one Bitcoin is worth nearly US$40,000. In the cash (smart-wallet) market to purchase 1 Bitcoin would need US$40,000. With a futures contract you can open a CME Bitcoin Futures position at a fraction of the cost. The 1/10 sized contract gives you exposure to 1/10 of a bitcoin requiring a margin of only AU$4,000 making it much more accessible to the average trader.
- Flexibility to go Long or Short
When you purchase Bitcoin in the spot markets, you make a profit only if prices go up. However, in the bear market, you can’t make money. Futures contracts allow you to profit from short-term price movements regardless of direction. Even when the price of Bitcoin falls, you can participate in the downward move and trade along with the momentum. With futures contracts, traders can develop sophisticated trading strategies such as short-selling, arbitrage, pairs trading, etc. Additionally, futures contracts are also used to hedge against downside risk and protect a portfolio from extreme price volatility. Miners and long-term holders often use futures contracts to protect their portfolios from unexpected risks.
The futures markets offer deep liquidity with trillions in monthly volume. For example, the Bitcoin futures market sees an average monthly turnover of $2 trillion, far greater than the Bitcoin spot markets’ trading volumes. Its robust liquidity supports the process of price discovery and allows traders to transact in the market swiftly and efficiently. A liquid market is generally associated with less risk because there is always someone willing to take the other side of a given position, and traders will incur less slippage.
- Futures vs Spot Prices
The price of a cryptocurrency on the spot market is the ruling price for all spot transactions, and this is known as the spot price. Buyers and sellers determine crypto spot prices through an economic process of supply and demand. In contrast, the futures price is based on its prevailing spot price plus the cost of carry during the interim before delivery. The basis represents the cost of carry of a futures contract. The basis can be a positive or negative number. A positive basis relationship means that the futures price trades higher than its spot price; vice versa. The basis may fluctuate due to changes in supply and demand, but due to the forces of arbitrage, it will eventually go to zero on the expiration day.
The CME Website is a great resource for further information on trading Bitcoin Futures
Futures and swaps trading is not suitable for
all investors, involves the risk of loss and should only be undertaken by
investors who are eligible contract participants. Futures and swaps are
leveraged investments, and because only a percentage of a contract’s value is
required to trade, it is possible to lose more than the amount of money
deposited for a futures or a swap position. Therefore, traders should only use
funds that they can afford to lose without affecting their lifestyles and only
a portion of those funds should be devoted to any one trade because they cannot
expect to profit on every trade.