The workings of Bitcoin Futures

The Bitcoin world is excited about its formal entrance into the Wall Street party. With Chicago Mercantile Exchange (CME) starting Bitcoin futures, and NASDAQ following, it is important to understand the inner workings to successfully maximise from this initiation.

bitcoin future trading
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December is a month to celebrate, with Christmas and the glorious CME Bitcoin futures. This has led to a rise from $6,100 to more than $11,000 in the end of November. For the beginners in financial trading, the main question is what is a Future? This can be answered as when two parties are allowed to exchange an asset at a specified price at an agreed upon date in the future. CMEs bitcoin futures will settle the deal in cash.

The contract will consist of five bitcoins, and $5 will be the tick per bitcoin. This will total it to $25, which means that if the contract moves they can gain or lose $25 per contract they hold. CME Globex and CME Clearport will be the two entities which will start Bitcoin futures, with timings of 4pm CT Sunday to Friday.

The spot position limit is of 1,000 contracts per person or entity in terms of limit. The price limit will be 20% above or below the prior settlement price and will be based on the Bitcoin Reference Rate. Bitcoin Reference Rate is the daily reference rate of the U.S Dollar price of one bitcoin as of 4PM London time. This will be a representation of Bitcoin trading activity on Exchanges.

A futures contract will hedge positions and hence arbitration will take place. So for example if the price in the futures market is $500/BTC, the investor will need to buy 50 futures contracts worth $10 each. He then decides if he wants to play positive by buying long with buy contracts or negative by selling short on sell contracts. The game plan needs to be planned well, as fluctuations will take place and hence can be risky.

In latest updates, CME Group revealed along with CBOE and Cantor that cryptocurrencies will be listed as financial products starting on December 18. This will be pursued as a self-certified listing, and then will work with the agency to set a standard to the offerings. CME will use a custom reference rate created with their partner Crypto Facilities, while CBOE will use data from New York based cryptocurrency exchange Gemini.

CME Group Chairman Terry Duffy, has commented about necessarysafeguardsbeing put in place, which will be regulated to provide transparency, price discovery and risk transfer capabilities.