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Smaller Investors: Getting In On Bitcoin Futures

January 18, 2018 11:15 am
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After a somewhat bumpy start at the CBOE Global Markets (NASDAQ:CBOE) and the CME Group (NASDAQ:CME) exchanges late last year, bitcoin futures contracts have finally become a reality, marking another key milestone in an eventful stretch for bitcoin, the world’s most popular cryptocurrency.

Bitcoin futures trading at the CBOE’s futures exchange was an eventful affair, with price surges in excess of 20 percent causing trading stoppages at least two times during the first day of trading. CME’s bitcoin futures launch was less dramatic when trading began on Dec. 18, a week after the launch by CBOE, even though both events have contributed to the wild rally in the price of bitcoin.

The idea of trading crypto futures on traditional financial exchanges is one of the major factors that are helping fan this rally and is playing a significant role in redefining the game for institutional and individual cryptocurrency investors.

For hedge funds, banks, and institutional investors, the bitcoin futures market provides a regulated path into the crypto craze, with many in the industry looking forward to a Bitcoin ETF.

For smaller investors, bitcoin futures mean a bright future in the crypto world, though there’s still a lot of risk and uncertainty in the industry.

Big Game

Perhaps one of the biggest hurdles for smaller investors is the amount of investment required to become a player in bitcoin futures. On the CME Group futures exchange, for instance, investors are required to invest at least 5 bitcoin for a contract and at least 5 contracts in a single trade. This basically means that you won’t be able to invest in bitcoin futures without at least $300,000 when the BTC price is at $15,000.

In addition to the cash barrier, experience is also another important prerequisite, even if you have access to the large cash investment required. As a rule of thumb, stay away from bitcoin futures if you haven’t traded profitably with the likes of S&P 500 (CME: ES) and crude oil (NYMEX: CL) futures markets.

Risk And Wolatility Won’t Go Away

While futures were originally devised as a means of hedging risk and managing volatile investment portfolios, bitcoin futures have so far been characterized by high volatility, a trend that saw futures trading suspended multiple times on the two major exchanges during those first few days.

And even as the first bitcoin futures settled yesterday, a month after trading began on the CBOE exchange, it was still a day marked by wild volatility throughout the day, perhaps a sign of what’s to come in future.

Bitcoin futures may increase volatility for a couple of reasons, but the biggest reason might have to do with a new type of trading environment introduced when institutional investors stepped into the crypto game.

The bitcoin futures market drew in many institutional investors with complex trading tools that might have a negative effect on smaller retail investors. One of the purposes of such tools might be to prevent losses in case of a tanking market, usually through a stop-loss order.

Dan Steadman, a financial advisor and consolidation loans consultant based in Austin, Texas, says stop-loss orders enable investors to sell their assets when a certain price point or threshold is reached. With bitcoin futures, if many institutional investors place stop-loss orders within the same price range and those are executed simultaneously when prices dip below these predetermined levels, the market may be thrown into a selling frenzy.

This will obviously have a negative impact on the crypto market, and according to Steadman, introduce new levels of market volatility and risk.    

Not All Doom And Gloom

There’s still a lot of uncertainty and probable downsides to bitcoin futures. Still, many in the crypto world agree bitcoin futures will be good for the crypto market in the long run. Because they don’t necessarily involve trading with actual bitcoin, they are a good way for wary investors with an interest in the crypto game to get in.

They are also a clever way to get into the crypto game in places where crypto trading is banned or highly regulated, which is where many countries seem to be headed anyway.

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