The Advent of Bitcoin Futures Trading: Is it Worth Taking Part In?

Bitcoin Trading Chart

“Bitcoin Trading Chart” (CC BY 2.0) by wuestenigel

If there’s one thing technology has done for the trading world, above all else, it’s how it created new opportunities. The obvious example of this would be the growth of online trading and the flow of fresh blood its brought into the industry. Today, through a combination of tutorials, social media alerts and easy to use platforms, amateurs can trade just as easily as professionals. Prior to this, the investment world was something of a closed operation both practically and culturally. However, since technology has opened up the doors for new traders and new ideas, the winds of change have swept across the industry.

Perhaps the most interesting example of the trading world’s evolution came at the close of 2017, with the advent of bitcoin futures trading. Owing to the surge in the popularity of bitcoin and other cryptocurrencies, a demand for futures trading started to emerge. Although the initial markets were met with some scepticism, the first contracts on the Cboe Options Exchange closed on January 26, 2018, without too much of a hitch.

Initially, many had raised concerns about how the price of a bitcoin contract would be accurately tracked given that it’s a non-physical asset traded over multiple exchanges. Indeed, when you look at how “traditional” futures trading is carried out, the contracts are derived from a single stock index. For example, anyone looking at futures trading options on Australia’s ASX 200 would have the option to buy contracts in 17 different sectors, including the Bank Index, Energy Index and Industrials Index. In this scenario, as per the basics of futures trading, all the assets are registered with the same exchange, i.e. the ASX 200. Because of this, there is a much greater level of coordination which, in theory, leads to more accurate pricing.

Bitcoin Chart

“Bitcoin Chart” (CC BY-SA 2.0) by Fabian Figueredo

In contrast, bitcoin is still an unregulated financial asset that’s traded over dozens of exchanges. Although traders buying contracts through Cboe will all have the same start price and end price, the determination of those prices could be problematic due to differences between exchanges. For instance, when you search for bitcoin’s daily price, you often get different answers depending on where you look. The reason for this is that bitcoin isn’t traded in one place and, moreover, exchanges set their own average price based on that day’s trading volume.

Now, as the market has evolved, the daily price has become more accurate due to the availability of more data. Moreover, futures trading companies are now starting to find a home on established exchanges. In Q1 2018, Australia’s XBT Investments made a move to get listed on ASX. Although this doesn’t directly address the underlying issue of pricing, it does create another layer of authority for the market.

However, in practice, it’s still an average figure derived from the prices across the major exchanges. Given the fluctuations in prices and the fact there is no single authority (like the ASX 200), bitcoin futures contracts are by no means a solid bet for the future. The current hype surrounding the market is undoubtedly driving the desire for futures trading, but how viable this is in the coming years remains to be seen. Technology has brought another asset to trade and that may have some positive benefits in the short-term. For now, though, it may be too early to tell whether you should be seeing bitcoin trading in your future.


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