A lot of the hype behind Bitcoin’s price is being attributed to futures and the increased amount of liquidity that is expected from institutional investors due to them, but there’s also a lot of questions in regards to the effect it will have in Bitcon’s volatility, the price manipulation on wallstreet and more
Today I wanted to help you understand a little bit better what is happening, starting with the basics
What is a future contract?
Simply put 2 people agree on buying and selling something at a given price at some point in time in the future, that means that if the market price increases beyond the price of the contract the person who agreed to buy (long position) “wins” because the future contract allowed him to buy at a lower price than the one the market is offering, and the person who had a short position (the seller) lost the opportunity to sell at a higher price (the market price) because the already agreed at a different price.
Who will be investing in them?
The mayority of people investing in futures are going to be: institutional investors, accredited investors and brokers in the behalf of wealthy clients, not the retail investors. Why? Because they don’t have enough money to cover the initial margin requirement and also because it is more complex to understand than other ways of investing.
So whats the result of this? This type of investors tend to be a little bit more cautious and as a result they will probably wait for the first cycle to end to get and idea of the volatily, if the margin requirements were high enough, and overall to get a better grasp of what to expect.
Wtf are margin requirements?
A deposit you make in good faith worth a certain percentage of the contract (44% for the Cboe ) and after that every single day depending on the price fluctuations you will either win or lose some money from that deposit depending if the price went in your favor or not. Why? Something you need to understand is that this futures contracts are cash settled so that means that at the end of the contract you don’t sell or buy an actual Bitcoin, you just give the other person the money to buy an actual Bitcoin or the amount of money they would have gotten from selling and actual Bitcoin.
Now the important part? What does this mean?
People are basically betting on the price of something they don’t NEED to own, so this means that all the money going on futures contracts doesn’t have to go to or through Bitcoin and even in the case t does it could take to the end of the contract to get there because it is at this point that the transaction actually happens
So don’t expect a huge pump of liquidity right away and if it’s not as high as expected maybe this could turn into a healthy correction for Bitcoin’s price, however this doesn’t mean that Bitcoin futures are a bad thing since they will offer more liquidity and more efficiency helping match supply and demand which will result in less arbitrage opportunities between exchanges since people will likely start to do arbitrage between exchanges and the futures price of Bitcoin and also less volatility due to a better pricing market (not necessarily in the short term).
So sit tight and let’s see what happens after we start a new face in the evolution of crypto and blockchain technology.
Sort: Trending