The article on Trading Bitcoin Futures is the opinion of Optimus Futures, LLC.
The cryptocurrency Bitcoin that was brushed off by many experts in the past as a worthless idea is up over +1,000% in 2017 alone. Part of that massive price explosion has to do with the breakthrough news that Bitcoin Futures will begin trading – for the first time ever – on regulated American futures exchanges. It started trading at the CBOE on Sunday, December 10th and on the much larger CME exchange on Monday, December 18th.
Source: WSJ (past performance is not indicative of future results)
Bitcoin’s entry into the mainstream futures arena promises potentially further liquidity, volatility and increased leverage, paving the way for trading conditions more suitable to traditional traders looking to gain exposure and leverage Bitcoins volatility without owning the actual cryptocurrency.
But should you really be trading Bitcoin futures just yet? This article 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.
Advantages of Trading Bitcoin Futures
Some of the smartest traders in the game can be credited for making their moves early. Getting in on a trade before the masses allows early familiarity in terms of managing the risk 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).
Trader and investors that were not 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 new entry point with Bitcoin futures. And the same benefits of trading in the futures market over the spot (crypto) market holds true with Bitcoin as well, with regulated exchanges utilizing 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, 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 ETF’s, further backing the logic behind adding Bitcoin Futures to your trading portfolio.
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 actually look for in a contract. Volatility is the key to the development of successful day trading and scalping methods. Despite the short history of cryptocurrencies, we can see increased volumes on the underlying asset, and if we have the same level of volumes increases on the futures side, we may see the volumes surpass contracts like E-Mini S&P and FDAX, which are amongst most heavily traded contracts for day traders.
The Case Against Trading Bitcoin Futures
While the proposition and the excitement of taking 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 analysis before pulling the trigger.
Is Bitcoin in a Bubble?
First, we need to address the question that has been around almost as long as Bitcoin itself. Is Bitcoin in a bubble? We wish we could sum up the answer in Yes or No. Unfortunately, it is not that simple and to be honest, we are dealing with a digital asset that has experienced mass adoption without any comprehensive legislation. We are still not clear who are the buyers or sellers in the market, and what purpose this asset class will serve in the long run. Is it a store of value similar to Gold? Or is it a mean of payment similar to traditional fiat currency.
Bitcoin’s exponential price movements over the past two years, at least on paper, deserves to be plotted against some of the famous financial market bubbles in the past, including the Tulip Mania of the 1660’s, the Great Depression, the dot.com bubble and the 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 these levels of growth and is extremely vulnerable to a ‘pop’.
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 variables such as electricity (for mining) to actual payment use. This leads to an asset that we have never seen before in terms of evaluating its value or finding comparables for more reasonable explanations.
The Perils of a New Futures Contract
There are definite reasons to consider taking part in a brand new futures market product. There are also about just as many pitfalls that exist precisely because of the fact that 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 expect the CBOE and CME exchanges to take extrinsic action to curb the volatility 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. For example, Bitcoin Futures on the CBOE surged as much as 26 percent from the opening price in their debut session, triggering two temporary trading halts designed to calm the market.
Past performance is not indicative of future results.
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.
Will Bitcoin’s Entry into Mainstream will Fuel Liquidity and Curb Volatility?
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 markets in general. For one, it is unlikely that risk-averse institutional futures traders 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 margins that are characteristics of the futures market.
Does Technical Analysis apply to Bitcoin?
It is very common for futures traders to rely on price action, technical indicators and general chart reading skills to determine directional biases and potential trading entries and exits. But Bitcoin is a new market with no history to be taking cues from along with frequent volatility spikes, easily putting 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 the CME Bitcoin futures for example – where the Bitcoin Reference Rate (BRR) will be used, which is essentially 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, it poses 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 warned of the potential pitfalls trading in a new, volatile and uncertain market.
At best, we believe trading Bitcoin futures right away is perhaps more suited to skillful and well-capitalized 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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