Back to the Futures: Crypto Investing Looks Forward
As the price of bitcoin was about to hit an all-time high last December, announcements from the CBOE and CME Group gave crypto investors something else to be excited about. The two firms announced their commodities exchanges would soon offer the trading of bitcoin futures.
While this was an anticipated action by those following crypto developments closely, it was certainly a monumental step in the short history of crypto investing. Having reputable, established exchanges commit to trading these assets is a big deal.
But what exactly does this mean for crypto investors? Are futures the way of, well, the future?
Old is New Again
Futures contracts allow investors to buy or sell an asset at a set price – yeah, at some point in the future. Buyers are legally bound to pay for the underlying asset at the expiration of the future, while the seller is bound to sell that asset. These legal agreements are standardized and then traded on exchanges such as the CBOE. Most often, investors utilize futures to hedge the risk that a particular asset will significantly rise or fall in price down the road.
The concept behind futures is not new–there have been binding agreements to sell assets at set future prices since ancient times–but futures contracts have more recently become an important tool for investors to address down-the-road price fluctuations in a variety of assets. Like with any other type of derivatives trading, it’s important that investors are comfortable with the inherent risks that tag along with these types of investments (e.g., leverage).
The exchanges’ decisions are additional signs that the days of sophisticated investors getting queasy over hearing the words “cryptocurrency” and “investing” together are coming to a close. Futures have been understood and utilized by these investors for decades, so applying the use of these types of financial contracts to bitcoin makes intuitive sense. But, of course, bitcoin is still viewed as being extremely complicated thing to understand.
So how exactly will these bitcoin futures work?
The short answer is that bitcoin will be treated just like any other type of underlying asset. The prices of bitcoin futures are based off the bitcoin price, just like the futures for stocks, bonds, commodities or other tradeable assets. Like any other type of futures contract, bitcoin futures will be regulated by the Commodities and Futures Trading Commission, which has jurisdiction over US commodities markets. All that’s needed now for investors to buy these instruments is a registered futures broker.
Bitcoin is currently the only cryptocurrency with a tradeable futures product in the US, but it’s quite possible this may change in the future (futures contracts for Ripple’s XRP and Ethereum’s ETH are currently traded in the UK). Time will tell.
Not surprisingly, there are skeptics with concerns about the introduction of bitcoin-related derivatives. The Federal Reserve Bank of San Francisco recently released an opinion that the introduction of bitcoin futures impacted the price of BTC in a manner similar to the “rise and collapse of the home financing market in the 2000s.”
But while skepticism should be expected, the reality is that the trading markets for crypto assets are developing a fast clip. Look no further than Goldman Sachs recently announcing it would start trading bitcoin futures, or this week’s New York Times article about Susquehanna International Group’s crypto trading operations — or even recent press reports about Fidelity Investments expanding in the space.
While crypto trading volumes remain low compared to traditional assets, the actions of these firms–and many others–seem to be indicating that this all could soon change.
Christopher Lloyd, playing mad scientist Doc Brown in “Back to the Future,” warns Marty McFly about the dangers of having information about the future:
“Even if your intentions are good, it can backfire drastically!”
For bitcoin investors, the future shouldn’t seem so scary.
As new investment products continue to be developed, more is understood about the risk/reward trade-off with crypto assets. Exchanges deciding that they will offer cryptocurrency futures means that more credibility is arriving to an area that has struggled to be viewed in a positive light by both regulators and sophisticated investors.
There will no doubt continue to be uncertainty as these markets develop. What is certain, however, is that crypto investing won’t be going back in time anytime soon.