The article is the opinion of Optimus Futures, LLC.
The cryptocurrency Bitcoin that has been brushed off by many experts in the past as a worthless idea soared since it’s day of inception. Part of that massive bout of buying had to do with the breakthrough news that Bitcoin futures will begin trading – for the first time ever – on regulated American futures exchanges. Bitcoin futures started changing hands at CBOE last Sunday, and in a week, at the much larger CME exchange will begin trading its own Bitcoin futures contract.
Bitcoin’s entry into the mainstream futures arena promises potentially further liquidity, volatility, and increased leverage. Hence, creating more idealistic trading conditions for nonrisk-averse traders wanting exposure and leverage to Bitcoin without owning the actual cryptocurrency.
But should you really be trading Bitcoin futures just yet? Below we will weigh the pros and cons of sitting on the sidelines for now versus diving at the deep end of the pool as a retail futures trader.
The Case for Early Adopters
Some of the smartest traders in the game could be credited for making their moves early. Getting in on a trade early allows early familiarity in terms of managing risk the that exists behind the underlying asset. (In our opinion, due to external factors where there is lack of clear regulation in the crypto Bitcoin markets, the Futures bitcoin currency traders need to adopt very strict cash and risk management rules regardless how early or late they started).
For all the traders who weren’t able to get in on the Bitcoin bandwagon over the past couple of years when the cryptocurrency really took off in a parabolic move, now have a fresh launchpad with futures products pegged with Bitcoin now being offered.
The standard benefits of having to trade the futures market over the spot (crypto) market, of course, hold true with Bitcoin as well. The exchanges have very strict rules for price discovery and price movements.
The proposal becomes even more tempting when you notice that some of the sharpest moves for Bitcoin in the past have been centralized around its fate as a mainstream medium of exchange. With Bitcoin futures taking center stage in America which is the world’s largest financial market – there is a real incentive to adopt the currency for its potential use and potentially even leading to the licensing of Crypto based ETFs. This may potentially deserve your attention in terms of adding Bitcoin Futures to your trading portfolio.
Lastly, there is no doubt that Bitcoin is one of the most volatile contracts with a high-risk and reward. However, this is one quality that day traders and algo traders look for. Volatility is the key to the development of successful day trading and scalping methods. Despite crypto’s short history, we can see increased volumes on the underlying asset, and if we have the same type of volumes increases on the futures contract, we may see the volumes surpass contracts like E-Mini S&P and FDAX which are amongst the favorite of day traders.
The Case Against an ‘Urgent Action’
While the proposition and the excitement of having to take part in a newly established futures market pegged to an underlying instrument that has grown 50 folds may be extremely tempting, a risk-averse approach would require a deeper thought before you pull the trigger.
Is Bitcoin a Bubble?
We need to first address the question that has been around almost as long as Bitcoin itself. Is Bitcoin a bubble? We wish we could sum up the answer in a simple Yes or a No. Unfortunately, it is not that simple and to be honest, we are dealing with a digital asset adopted by retail without a comprehensive legislation. We are still not clear who are the buyers or sellers in the market, and what purpose will this asset serve.
On paper at least Bitcoin’s exponential price movements, especially over the past two years, deserves to be plotted against many of the famous financial market bubbles in the past including the Tulip Mania of the 1660s, Great Depression, the tech bubble, 2008 real estate boom.
At the heart of it, experts mainly argue that unlike real estate and stocks that offer rent and dividends as a return, Bitcoin – primarily being just a medium of exchange – does not provide any intrinsic value except an expectation of benefiting from price differentials. Thus Bitcoin’s valuation as it stands now is unsustainable at current growth levels and is extremely vulnerable to a ‘pop’, some experts in the media claim.
But, we also have to remember that we have never seen anything like Bitcoin. It is a mathematical contract with limited supply whose price depends on variable varying from electricity to actual payment use. We might have an asset in our hands that we have never seen before in terms of evaluating its value.
The Perils of a New Market
There are definite reasons to consider in taking part in a brand new futures market product. There are also about just as many pitfalls that exist precisely because the market is new. Some of these pitfalls are created by market forces and price discovery and others by the very platforms that facilitate the trading.
For an underlying instrument as volatile as Bitcoin, you wouldn’t expect the CBOE and CME exchanges to not be taking extrinsic action to curb the volatility normally associated with Bitcoin. For Bitcoin futures that begin trading today on CBOE, the exchange has in place an automatic two-minute trading halt for a 10 percent move for the day, and a five-minute halt for a 20 percent spike. There are far from “normal” trading conditions that would suit a new futures trader and should ring a bell for you straight away.
Trading Bitcoin futures will not be cheap either. Margin requirements are higher than 40 percent. With Bitcoin trading around $15,000 apiece coupled with wild volatility swings almost customary for the cryptocurrency, many would wonder if such contract is suitable for an undercapitalized trader.
Bitcoin’s Entry into Mainstream will Fuel Liquidity and Curb Volatility, or Will it?
One of the primary reasons that Bitcoin futures are being treated as good news for the cryptocurrency is that mainstream futures trading activity, particularly from larger institutional traders, should lend Bitcoin the much-needed liquidity that could potentially curb volatility and allow the cryptocurrency to emerge as a mature market for all investors.
While that may eventually happen in due course of time, some claim much of the initial futures trading for Bitcoin will likely reflect the same volatility that is associated with the cryptocurrency market. For one, it is unlikely that risk-averse institutional futures traders would want to be executing directional trades without true price discovery, however, in reality, there could be players in arbitrage, HFTs, and algos. This, in turn, leaves the market in an environment not very different to the one that the cryptocurrency has been trading in up until now.
For the average retail trader, this represents a dangerous and volatile trading environment that becomes even more risky with leverage and margin that are characteristics of the futures market.
Technical Analysis on Bitcoin Futures
It is very common for futures traders to rely on price action, technical indicators and otherwise general chart reading skills to determine directional biases and potential trading entries and exits. With a new market with no history to be taking cues from and frequent volatility spikes can easily put off even the most avid of technical traders.
A natural inclination for traders here would likely be to revert back to Bitcoin’s actual price movements as traded in the past on derivate unregulated exchanges around the world, but beware! Analysts claim the average price that Bitcoin futures might initially trade at, at centralized exchanges could be dramatically different to settlement prices. This is because – in the case of CME Bitcoin futures for example – a Bitcoin Reference Rate (BRR) would be used which essentially is a time-weighted average of trades conducted in a certain period of time. But this rate, derived from prices across different exchanges that realize different prices for Bitcoin – especially during times of high volatility – implies a wide spread between the average settlement price for a Bitcoin futures contract and the price realized on the exchange.
What’s more, with little mainstream studies and research on Bitcoin’s correlation with other traded asset classes and its overall fundamental behavior should pose a risk even for fundamental futures traders looking for Bitcoin exposure.
The Bottom Line
Should you then be actually trading Bitcoin futures right now? The answer will really hinge almost entirely on the trader’s own risk appetite, experience and skill level. We have outlined the benefits of having to jump in on the Bitcoin bandwagon early but also displayed the potential pitfalls of having to trade in a new, volatile and uncertain market.
At best we believe trading Bitcoin futures right away is perhaps more suited to skillful and affluent traders with ample experience of trading volatile markets.
There is a substantial risk of loss in futures trading. Past performance is not indicative of future results. Past performance is not indicative of future results,
Disclaimer: Virtual currencies including Bitcoin experience significant price volatility, and fluctuations in the underlying virtual currency’s value between the time you place a trade for a virtual currency futures contract and the time you attempt to liquidate it will affect the value of your futures contract and the potential profit and losses related to it. Be very cautious and monitor any investment that you make. There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.
Please be aware, however, that just because futures on virtual currencies, including Bitcoin, must be traded on regulated futures exchanges does not mean that the underlying virtual currency markets are regulated in any manner and what occurs in a virtual currency’s underlying market will impact the price of a virtual currency’s futures contract
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