Bitcoin futures: the arrival of futures – Jackie Brown
I am just a banker who does the work of God
While the crazy rise of the course of bitcoin warms the spirits and that the question “Bitcoin is it a bubble?” is on everyone’s lips, two well-known financial behemoths have launched products derived from its valuation: futures, or futures in good French. Before assessing their potential impact on the market, let us recall what is the substance of these financial instruments that make a lot of ink.
The derivatives.
It is always amusing to note that the most fierce criticism of Bitcoin concerns its speculative aspect, or the lack of intrinsic value in its accounting unit.
Many bankers or economists also describe Bitcoin as a “Ponzi pyramid”, a “bubble” or even a scam. To take a step back, let’s start by comparing some numbers:
Derivatives are financial instruments that are difficult to apprehend, yet very real. These are bets made on just about any asset, value or quantifiable state in this lower world. For example, let’s take a look at the weather next spring: let the investors bet on the rain or the weather, let’s sign all this and we have a derivative on the weather. It is possible to bet up or down on the price of a commodity, a set of commodities or a credit default. By definition, derivatives have no intrinsic value: they are contracts whose value derives from that of an underlying asset or from a state of affairs to come. It is of course possible to create a derivative product from a derivative product. Banks can also establish canceling contracts: for example, bank # 1 pays X dollars to bank # 2 if that value increases, and conversely, bank # 2 pays X dollars to bank # 1. 1 if the same value increases. All this makes this joyous and dangerous mess difficult to quantify. It is almost impossible to know who owns the collateral associated with this or that product. If a bank goes bankrupt because of a bad bet, by domino effect, other financial institutions with stocks or assets will also be bankrupt.
For simplicity, derivatives are the giant casino of global finance. Regulators, more and more severe with regard to cryptocurrency users, seem on the other hand very permissive towards bankers, who allow themselves economic aberrations such as the negative interest rate loan and can esoteric financial instruments whose essence escapes ordinary mortals.
In 2012, the nine largest banks in the world were exposed to $ 228 trillion in derivatives: about three times the world economy. What to think about the concept of Ponzi pyramid.
What is a future contract?
A futures contract — a futures contract — is a particular type of financial derivative product: it allows two parties to set up an agreement to buy (or sell) an asset at a price and a date fixed in advance.
Initially, this financial product was invented to allow certain market participants to hedge against a risk: for example, a wheat producer, to guard against price variations between the moment he plants his seeds and the day of the harvest then put on the market, can subscribe to a future contract which will then allow him to sell his crop at a fixed price.
Today, forward contracts are primarily used by investors and traders to speculate wildly on the price variations of any commodity on the market. The Chicago Mercantile Exchange, which will be discussed below, offers futures on conventional commodities such as gold, oil or corn, as well as currencies and financial indices.
There are two types of settlement of a futures contract:
Physical settlement — physical settlement: At the closing date, the convenience considered (eg oil) is delivered to the buyer. Financial settlement — the financial settlement mechanism merely credits or debits the different parts of the difference.
This is the mode of financial settlement that is obviously preferred by investors. On the one hand because many futures are indexed on assets that have no physical existence, and secondly because no trader wants to end up with a container of wheat bags at the foot of his building It is estimated that the proportion of futures contracts settled by a physical delivery represents only 2% of all these futures.
Futures trading is not easy because these products have several peculiarities: they only exist for a definite period, the price of a contract generally increases with its duration, and the market places offer a knock-on effect. important leverage for investors. The leverage gives the trader the opportunity to subscribe to many more contracts than his collateral alone would allow him, which has a multiplier effect on his gains and losses.
The first two American Bitcoin futures.
After several refusals, the Commodity Futures Trading Commission [4] finally accepted two futures contracts backed by bitcoin: the Chicago Board Options Exchange’s Cboe Bitcoin (USD) Futures and the Chicago Mercantile
Exchange’s BTC Futures.
The Chicago Board Options Exchange contracts.
CBOE Holdings is the largest option exchange exchange in North America. In 2016, 1,184,553,418 contracts were traded, including 60,177,810 futures contracts. The marketplace launched its first future Bitcoin under the XBT
label on December 10th.
The specifications of the contracts are as follows:
The contracts are based on the bitcoin price index of the Winklevoss brothers exchange platform, Gemini. A contract is a bitcoin. Three monthly contracts are currently listed. The regulation is financial. The expiry date is two business days before the last Friday of the month corresponding to the contract and the payment schedule at four o’clock in the afternoon.
The success of the CBOE futures contracts when they were launched was such that the platform was stormed and unavailable for several hours.
At the time of writing, the volume of contracts exchanged over the past ten days has just exceeded 4000.
The contracts of the Chicago Mercantile Exchange.
Following the merger of the Chicago Mercantile Exchange (the largest US futures market) with the Chicago Board of Trade (the world’s oldest trading exchange), the CME Group has become the world’s largest futures trading company. . You can buy future contracts that concern anything and everything.
The contracts are based on the Bitcoin Reference Rate (BRR), the aggregates of 5 different BTC / USD marketplaces: Bitfinex, Bitstamp, GDAX, itBit and Kraken. It should be noted that the famous bitcoin evangelist Andreas Antonopoulos is part of the BRR team as an independent expert. A contract corresponds to 5 BTCs. The contracts listed are monthly. The settlement of the contracts is financial and is made between 14:59 and 15:00 at the expiry date.
So far, over 700 contracts have been traded: in BTC equivalents, trading volume over two trading days at CME has almost caught up with CBOE after ten days of trading.
What are the implications for the market?
The general case.
The influence of future markets on spot markets — that is, the influence of futures on the price of their underlying assets — has long been debated in the business world. The commonly accepted premise is that speculators favor futures because of the very important leverage effect.
If we consider traditional markets, two theories are then put forward:
Quantity Theory: Futures traders (mostly hedge funds and commodities index investors) bring large amounts of new money into the futures markets, pushing up prices, regardless of the fundamentals of the spot market. Theory of contagion: The speculation of traders in the futures markets distorts the perception of “commercial” traders in the spot market, making them implicitly complicit in the manipulation of the price.
The financial products are not created in finite quantity, and their subscribers are not settled through the delivery of the physical underlying but in fiat currency. In addition, the settlement of any contract is done by selling what has been previously purchased (or by buying what has previously been sold); thus, the pressure to purchase is offset by the pressure on the sale. The influence of speculators on “traders” would be palpable only if they believe that speculators possess information they do not have, which seems implausible and unconfirmed by the observations (for example, in the case of oil, shortly before the crisis of 2008, the futures were up sharply, which foreshadowed a shortage to come, yet stocks of barrels in inventories have not increased or declined, and drilling has resumed more beautiful, whereas it should have been the opposite).
As for the influence of futures on price volatility, here again, two theories oppose:
The Stabilization Theory: The migration of speculators to the futures markets offloads the underlying markets of these participants, which must reduce price volatility. In addition, speculators bring much more liquor [6] to the market, especially if it is illiquid, and the collective action of speculators and irrational investors causes the price far from its appropriate value.
The case of Bitcoin.
In this unknown and growing world of Bitcoin, it is even more difficult to make relevant analyzes, and many contradictory assumptions can be made.
Many expect a massive influx of cash on the market and believe that the launch of futures will attract even more traditional investors in the “real” market, which would accelerate the rise of bitcoin.
However, the majority of investors who will position themselves on futures are accredited institutional investors, or brokers for wealthy clients. Small fish do not have the margin requirements — the collateral required to use leverage — which are higher on Bitcoin than in the case of “traditional” futures because of price volatility. These requirements will no doubt be adjusted in the future, on the verge of experience. Professional investors are cautious and suspicious of Bitcoin, and do not want to buy the asset as such. They will therefore probably act with caution during the early periods, to test the volatility of the market. So there may not be as much liquidity as expected, which could lead to a correction, because the cryptocurrency market works according to the old saying “buy the rumor, sell the news”: the course is guided by the anticipation of news to come and then adjusts when these come true.
Many purists are anxious about the arrival of wealthy speculators who could destabilize or manipulate the current market by injecting massive liquidity. How could a bet on the price of Bitcoin affect the latter? By arbitrage of market participants between the price of the futures contract and the price of the underlying. The economic incentive to manipulate the underlying market, so that a bet taken on the derivative market becomes self-fulfilling, is very strong.
Early adopters and whales hate selling their precious BTCs. Their mistrust of traditional finance and the wolves of Wall Street is such that some would sell them nothing, not even at a disproportionate price, but many now have an interesting exit point. Would keeping BTCs be the best way to protect the decentralized network from the phagocyting of institutional investors? Still, it is the big boys of finance that can give Bitcoin a capitalization comparable to that of traditional markets.
Futures are fascinating and dangerous financial products for the person who manipulates them. In quantitative terms, after a few days of existence on the largest futures markets, their trading volume is low compared to the volumes of BTCs exchanged on traditional platforms. The influence of these futures can therefore be described as slight for the moment.
In the long run, the existence of these financial products and the influx of associated liquidity may improve the price discovery mechanism and arbitrage opportunities will decrease. The market may become more efficient and bitcoin prices less volatile, and adding new funds to the market will increase buying pressure.
Conclusion.
Futures are the first financial derivatives to appear in the world of cryptocurrencies; others will probably follow. The problem of exorbitant transaction costs on the Bitcoin network (and more generally, that of scalability) worsens and the solutions take time to be deployed: in the short term, we must expect a period of uncertainty over the market, although the buying fever of those who believe they have missed the train often offsets profit-taking.
Recall some golden rules for the crypto-investor:
Bear in mind that crypto-currencies are nascent, experimental and very risky financial technologies. Invest only money that you can afford to lose. Know and understand the fundamental characteristics of the asset that you want to acquire. Being able to answer the question: “What is the value of this product for me?” before making any decision.
Published at Tue, 10 Sep 2019 15:38:23 +0000
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By trendingtopics on 2019-03-25 12:36:08
