The first U.S. bitcoin futures are here. Bitcoin futures opened for trading on the Cboe Futures Exchange, LLC (CFE) on December 10, 2017. This is one of the biggest milestones for bitcoin since it emerged in the wake of the 2008-09 financial crisis. Bitcoin futures will bring much-needed transparency, greater liquidity and efficient price discovery to the ecosystem. Cboe will be soon joined by CME Group as it prepares to launch bitcoin futures contracts on December 18, 2017.

On October 31, 2017, CME Group, the world's leading and most diverse derivatives marketplace, had announced its intent to launch bitcoin futures in the fourth quarter of 2017. “CME Group's Bitcoin futures will be available for trading on the CME Globex electronic trading platform, and for submission for clearing via CME ClearPort, effective on Sunday, December 17, 2017 for a trade date of December 18” as per CME’s officials statement.

“Given increasing client interest in the evolving cryptocurrency markets, we have decided to introduce a bitcoin futures contract,” said Terry Duffy, CME Group Chairman and Chief Executive Officer. He further added, “As the world's largest regulated FX marketplace, CME Group is the natural home for this new vehicle that will provide investors with transparency, price discovery and risk transfer capabilities.”

Meanwhile Cboe said, “As an exchange-listed product, XBT futures provide a risk management tool for market participants seeking to hedge their underlying bitcoin holdings with a contract that settles directly to an underlying bitcoin auction price.” CFE is waiving all of its transaction fees for XBT futures in December 2017.

Both exchanges would allow exposure to bitcoin without having to hold any of the cryptocurrency.

 

Cboe

CME

Listing Date

December 10, 2017

Effective December 17, 2017 for trade date of December 18, 2017

Ticker

XBT

BTC

Contract Unit

Equal to 1 bitcoin

Equal to 5 bitcoins

Description

Cboe bitcoin (USD) futures are cash-settled futures contracts that are based on the Gemini Exchange auction price for bitcoin in U.S. dollars.

CME Group's Bitcoin futures will be cash-settled, based on the CME CF Bitcoin Reference Rate (BRR) which serves as a once-a-day reference rate of the U.S. dollar price of bitcoin.

Pricing

USD

USD

 

 

 

Settlement

The final settlement value will be the auction price for bitcoin in U.S. dollars determined at 4:00 p.m. Eastern Time (2100 GMT) on the final settlement date by the Gemini Exchange.

 

The contract will be prices off of the CME CF Bitcoin Reference Rate (BRR) which has been designed around the IOSCO Principles for Financial Benchmarks. Bitstamp, GDAX, itBit and Kraken are the constituent exchanges that currently contribute the pricing data for calculating the BRR.

 

Trading Hours

Regular: 8:30 a.m. to 3:15 p.m.(Mon), 8:30 a.m. to 3:15 p.m. (Tue-Fri)

Extended: 5:00 p.m. (Sun) to 8:30 a.m.

3:30 p.m. (previous day) to 8:30 a.m. (Tue-Fri)

CME Globex and CME ClearPort: Sun-Fri 6:00 p.m. to 5:00 p.m. (5:00 p.m. to 4:00 p.m. CT) with one-hour break beginning at 5:00 p.m. (4:00 p.m. CT)

Margin Rates

40%

35%

Clearing

Options Clearing Corporation

CME ClearPort

Contract Expirations

Initially the exchange will list three near-term serial months Eventually, CFE may list for trading up to four near-term expiration weekly contracts, three near-term serial months, and three months on the March quarterly cycle’

 

Nearest 2 months in the March Quarterly cycle (Mar, Jun, Sep, Dec) plus the nearest two “serial” months not in the March Quarterly cycle.

 

 

(Read more: Four Problems With Bitcoin Futures)

What Is a Bitcoin Exchange?

Bitcoin volatility has been a great concern among potential investors and traders. The huge fluctuations have mainly been due to the lack of confidence in the bitcoin system, its fragile reputation, and its stark reaction to bad news, which often leads to a steep price drop, before rising again. The wild fluctuations have calmed down a bit.

While volatile movements take away the attractiveness of any asset, a certain amount of swing in price creates trading opportunities. This is something that many traders and speculators have been taking advantage of by buying the digital currency and then selling at a profit through an exchange. The whole process makes bitcoin exchanges an important part of the ecosystem since it facilitates the buying and selling of bitcoins, as well as futures trading.

A bitcoin exchange operates somewhat similarly to online stock trading brokers, where customers deposit their fiat currency (or bitcoins) to carry out trades. However, not all bitcoin exchanges offer such services. Some exchanges are more like wallets and thus provide limited trading options or storage of currency (both digital and fiat) for trading. The bigger and more elaborate exchanges offer trades between different cryptocurrencies, as well as between digital and fiat currencies. The number of currencies supported by an exchange varies from one exchange to another. (For more, see: Why Is Bitcoin’s Value So Volatile.)

Typically exchanging is done through matching the buy and sell orders placed on the system of the exchange. The sell orders are made at an offer price (or ask) while the buy order (or bid) is made to buy bitcoins. It is similar to buying stocks online where you need to enter the desired price (or market price) for buy/sell along with the quantity. These orders enter the order book and are removed once the exchange transaction is complete.

Anyone interested in buying bitcoins needs to deposit funds in U.S. dollars, euros, or another currency supported by the exchange. The popular methods of transferring money to the currency exchanges are through bank wire transfers, credit cards, or liberty reserves. One of the pre-requisites here is to have a digital wallet to hold bitcoins. Bitcoins bought can be stored in a digital wallet, device, or paper wallet, depending on the buyer’s preference. For sellers, the fait currency for which the Bitcoins have been sold needs to be withdrawn from the exchange and sent to a bank. One issue that can arise is if the exchange has liquidity concerns at a particular point in time; such situations can delay withdrawal and transfer of funds into a bank account. (For more, see: A Look At The Most Popular Bitcoin Exchanges.)

Some exchanges offer trading on margin. When such an option is available, Bitcoiners are allowed to borrow funds from peer liquidity providers to carry out trades. The term "liquidity provider" refers to those who are ready to deposit their bitcoins and/or dollars with the exchange for use by others for a certain pre-fixed duration, rate, and amount. For example, say a Bitcoiner wants to buy 20 Bitcoins, anticipating that its price would rise in future and thus hopes to profit by selling them at a later date. If the person does not have sufficient funds to buy the 20 bitcoins, the margin facility allows him to borrow the amount required (20 X the price of bitcoins in USD) from a liquidity provider. When the Bitcoiner chooses to close the position, he needs to repay the amount borrowed plus the interest accrued during this time period. Remember that the amount accrued (loan + interest) needs to be reimbursed regardless of profit or loss at the time of settlement.

Additionally, a maintenance margin needs to be maintained in the trading account used to cover the losses incurred during trading. As the account gets depleted, a margin call is given to the account holder.

Futures: What Was Available Earlier

A futures contract is a technique to hedge positions and reduce the risk of the unknown. It is also used for arbitrating between current spot and future contracts. In the case of bitcoins, futures have been more associated with miners who face the risk of unknown future prices. OrderBook.net (formerly iCBIT), a futures marketplace operating since 2011, sells millions of futures contracts each month. The standard contract size (or tick size) is $10. A typical instrument would look like this: BTC/USD-3.14. Here "BTC/USD" signifies the rate of exchange between Bitcoin and US dollar, "3" means the month of March, and "14" signifies the year 2014. The trading symbol for the same instrument will be BUH4. Each month has a trading symbol like March is H (as per Chicago Mercantile Exchange), the "B" is taken from BTC and the "U" from USD, and "4" signifies the year.

In a futures market, if the price is $500/BTC, an investor needs to buy 50 futures contracts, each worth $10. If an investor wishes to open a positive position then he goes long with “buy" contracts, and if he decides to open a negative position, he goes short with “sell” contracts. An investor’s position can be either positive or negative for the same instrument. (For more, see: Bitcoin Mass Hysteria: The Disaster that Brought Down Mt. Gox.)

Bottom Line

A Bitcoin (spot or futures) exchange (like any online trading firm) charges its clients a fee to carry out trading activities. As exchanges face the risk of hacking and theft, it is wise not to trust an exchange with all your coins. You should split and keep part of them in other devices or cold storage. Now with bitcoin futures being offered by some of the most prominent marketplaces, investors, traders and speculators are all bound to benefit. These centralized marketplaces will facilitate trade based on a trader’s outlook for bitcoin prices, gain exposure to bitcoin prices or hedge their existing bitcoin positions. Overall, the launching of bitcoin futures by Cboe and CME will facilitate price discovery and price transparency, enable risk-management via a regulated bitcoin product and give a further push to bitcoin as an accepted asset class. (For more, see: The Risks Of Buying Bitcoins.)

 

 

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