The futures markets were designed for traditional investment classes, for a long period of time they concerned assets such as commodities and equities, however, the launch of Bitcoin futures is an important step towards a legitimacy of cryptocurrency. most popular.
What is a Bitcoin Cash Future?
In the futures market, an investor can trade futures contracts, which implies the purchase of an asset at a certain price with a set liquidation date.
The value of a futures contract for a particular instrument is therefore determined on the basis of what is established by the same contract, whether it concerns: gold, crude oil, an index or individual securities.
The futures markets have had the dominance of the financial markets for many years, the first futures market of the modern era is known as the Dojima Rice Exchange, launched in Japan in 1710. Some indicate the foundation of the London Metal Exchange in the 19th century, with origins dating back to the sixteenth century, going even further in time you can go back to the Hammurabi code of 1750 BC, this text established the sale of goods and services to be delivered at an agreed price at a future date.
The future contracts contain: the details of the class of the underlying in question together with the quantity of the purchase, the last trading day, the expiry date and the exchange on which the contract was purchased or sold. Futures contracts are created based on demand and are not automatically created by the market, they involve two parties, in which one party is going long on an asset class, while the other short.
Upon expiration of a futures contract, in the case of goods, a physical transaction or through a cash settlement takes place in the case of Bitcoin, although futures contracts can change owners on numerous occasions before expiry. It is important to note that the futures market is used by investors seeking to hedge exposures to a particular instrument or those seeking speculation only, none of which are interested in physical delivery as is the case in the spot / cash markets.
Although Cboe's Bitcoin futures were the first to be launched, the CME Group is considered to be the largest futures exchange in the world.
Both exchanges have opened the door to large institutional investors, offering them the opportunity to enter the Bitcoin world with the guarantee of a market with more regulations, transparency and liquidity.
Since Bitcoin is a virtual currency, liquidations will be based on cash and US dollars, and unlike crypto-markets, where trading is open 24/7, futures exchanges are not, they have more regular trading hours and limited to 6 days a week.
There are some main differences between the two exchanges on what they offer to those who try to hedge themselves from an exposure on Bitcoin or for those who want to speculate on future prices, we list some of the major differences:
The CME Group's Bitcoin futures contract price is based on a large number of trades, the CME CF Bitcoin Reference Rate (BRR) on a daily basis. In contrast, Cboe futures prices are based on a Bitcoin auction closing price on a single Bitcoin exchange known as the Gemini exchange.
With cryptocurrencies experiencing significant volatility, it is not surprising that both exchanges have fairly high margin requirements. The margin requirement for CME Group's Bitcoin futures is 35%, while on Cboe it is 40%. The amount of the margin requirement is a reflection of the volatility of the investment class. To give an idea, the margin for an S & P500 futures contract is only 5%.
Both exchanges involve the cash settlement of futures contracts on the expiry date.
In the Cboe futures exchange, a contract has 1 Bitcoin as its underlying, while in the CME Group exchange, a contract is equivalent to 5 Bitcoins.
Contract deadlines also differ, the CME Group has futures contracts which will expire in the next 2 months in the quarterly cycle of March and in the 2 months immediately thereafter outside the quarterly cycle. On the contrary, the Cboe will propose a series of monthly contracts with 3 short-term expirations, before including weekly contracts with 4 short-term expirations and 3 monthly with a quarterly expiration.
Clearing on the CME Group exchange takes place through CME ClearPort, while Cboe uses the Options Clearing Corporation.
There are also restrictions on the basis of which the respective exchanges allow prices to be changed before temporary and permanent suspensions are activated. On the Cboe exchange, contracts are subject to a 2-minute suspension in the event that the best offer or the price offered, in the first expiring contract, departs 10% from the end of the previous day. In the event of a resumption of trading, if the contract price goes above 20%, both positive and negative, the trading would be suspended for 5 minutes. On the CME Group stock exchange, contracts will be suspended according to the following price movement limits: 7%, 13% and 20%. In the event that the contract price reaches the 20% limit, there will be no stopping in trading and the trading will simply continue within the 20% limit for the rest of the session.
For CME Group Bitcoin futures, trades are available on the CME Group website, while CME Group also provides a list of brokers and liquidity providers by block for those who wish to trade in blocks or who are looking for intermediaries.
For those who want to enter the Bitcoin futures market, the first and fundamental question to ask is motivation: it is speculative or to protect the current gains you have with Bitcoins from a negative event.
The choice of the exchange can be considered arbitrary, but it would be better to opt for the exchange with the largest number of futures contracts, even if both can be considered liquid from the investor's point of view.
As mentioned above, the size of the contract differs for the respective exchanges, as well as the margin requirements, so these are also factors to consider.
When operating on the margin, you essentially get financing on the operation that is being carried out on the exchange of futures. Since investors do not actually own Bitcoins, the total purchase value does not need to be paid in advance of the contract expiration date. In the event that an investor holds a contract until the expiration date, the amount to be paid, if at a loss, is limited to the difference between the contract price and the actual market price. The margin is kept on a loan financing account to secure the transaction.
In addition to the guarantee, also referred to as the initial margin, investors are required to meet Mark-to-Market calls during the term of the futures contract. The Mark-to-Market margin ("MTM") is the difference between the cost of the position held and the current market value ("CMV"). In the event of a loss, the exchange will finance any margin drops resulting from an MTM call from the investor's margin collection account. The reverse is also possible, where the exchange credits funds to the account in the event that the investor has deposited margins greater than the required amount.
In the event that the margin account falls below acceptable levels, the investor will then be required to deposit into the account to meet future MTM requirements.
As mentioned previously, the sizes of the contracts for the 2 exchanges are different, the smallest contract on the CME Group exchange is 5 Bitcoins, compared to the single Bitcoin of the Cboe exchange. For institutional investors this may be a minor problem, but for a retail investor this is a minimum margin of $ 33,250 based on a Bitcoin value of $ 19,000 operating on the CME Group's stock exchange, compared to a margin of $ 7,600 for the Cboe stock exchange can make a difference by assuming that an investor is looking for a smaller contract.
The settlement at the end of the contract on both exchanges is made in US dollars, the regulations do not require the effective possession of Bitcoins during the duration of the contract. Since the futures market is a two-sided market involving a buyer and a seller, the counterparty risk for the final settlement is absorbed by the respective clearing houses.
It is worth noting that while those who believe in an increase in the value of Bitcoin will likely hold futures contracts until maturity, speculators will likely buy and sell Bitcoin futures before the expiration date, taking advantage of daily swings in response to noise. of the market. For this reason, market liquidity is particularly important for those who hold futures contracts, the inability to find a buyer can have deleterious consequences on the futures market and on the price of Bitcoin itself.