Great news, Bitcoin fans: You’ll soon be able to trade futures contracts in the cryptocurrency on the CBOE Options Exchange and also on the CME. Trading will start on December 11 and 18, respectively.
Even better news, they could be a better instrument than Bitcoin itself. Here’s why:
Futures exchanges run by markets experts. The creators of Bitcoin invented Blockchain, an exciting technology that may have many other uses. For that, these inventors should be commended.
However, they aren’t experts in creating markets. CME and CBOE both have long histories in creating successful venues for the buying and selling of futures contracts. The launch of these trading venues will enhance price discovery. That means any new information about Bitcoin will quickly be reflected in the price of the contracts. That will likely be far better than the price discovery on the existing Bitcoin exchanges.
Big financial firms understand futures. Wall Street firms are familiar with futures exchanges and how they work. Most have back-office operations that allow for such instruments to be traded with ease. That ease-of-use will attract more dollar volume to these Bitcoin-related contracts investment community. As a result, the market for Bitcoin futures will become more liquid, perhaps more liquid than Bitcoin itself. William Rhind, CEO of Granite Shares, recently explained to me how the very largest ETFs, such as the SPDR S&P 500, is now more traded than the underlying shares of the index. That could happen with these Bitcoin futures.
Reference price. The contracts will be settled each trading day using a transparent reference price. That reference price may not be perfect, but it will soon get written into contracts that involve Bitcoin being paid or received as happens in other markets. For instance, jewelry makers and retailers often use reference prices for gold in their contracts. In short, having a transparent settlement price will simplify the matter of using Bitcoin as a method of payment.
Futures contracts don’t go missing. You might lose money, but you won’t misplace the contract. A friend of mine bought a small chunk of Bitcoin and then found that it had disappeared. It’s a story I hear all the time from other folks. That is unlikely to happen when trading futures.
In addition, with rare exception, client cash doesn’t go missing in the futures business; it seems to get mislaid all the time in the Bitcoin business even though that isn’t supposed to happen.
You can easily bet on a decline in prices. Selling short a futures contract is as simple as buying one, which isn’t the case with stocks. If you think Bitcoin prices are in a bubble, then you can bet on a drop.