Bitcoin futures: What are they and how do they work?
With bitcoin futures hitting the market, we explain what they are and how they work
- Bitcoin futures contracts explained
- How do bitcoin futures work?
- What this means for bitcoin prices and other cryptocurrencies
- The SEC and cryptocurrencies
The world of bitcoin – and by extension, the world of cryptocurrency – has been given a lift by the US Securities and Exchange Commission (SEC) recently giving its seal of approval to allow a new bitcoin futures contract exchange-traded fund (ETF) to start trading.
But what are bitcoin futures contracts, and how will this affect the price of bitcoin? Let us explain.
Bitcoin futures contracts explained
A futures contract is an agreement to carry out a transaction at some point in the future at a price that is agreed today.
In other words, if the value of something goes up before the sale is completed, then the person buying the item – whether it a fiat currency, stocks, commodities or, in this case, a cryptocurrency – gets a good deal. If the price goes down, however, then the person selling the item gets the better end of the bargain.
How well futures are doing is often indicative of a trend in a particular market. For instance, if futures prices are going up, then it is expected the cost of that particular item will, ultimately, go up. If they are going down, that suggests that the price of the particular item will also go down.
Of course, these are only expectations and suggestions – also, something unforeseen could happen to influence the price of the thing being traded, so the future remains uncertain.
Although the futures contract contains an agreement for the transaction to be carried out on an agreed date, in practice that is often not the case. This is because you can buy your contract’s “opposite” – an agreement either to buy or to sell whatever is the asset in question. This has the effect of closing the original contract and taking the profit.
Futures contracts are announced on the market at the end of each trading session to give a daily valuation of their position in relation to market values. Since the financial crisis, there have been increasing demands that futures deals are cleared through exchange rather than over the counter, to provide more transparency.
How do bitcoin futures work?
So, what are bitcoin futures, and how do these work?
Bitcoin futures work like futures contracts with and for bitcoin. But how do futures contracts and ETFs relate to bitcoin, and what will futures in bitcoin mean? Can we make any bitcoin futures predictions?
The first thing to notice is that, as of today (18 October 2021), the SEC still has not officially approved bitcoin futures trading.
However, two bitcoin ETFs – the ProShares Bitcoin Strategy ETF and the Invesco Bitcoin Strategy ETF – could get approval from the SEC this week, as Bloomberg senior ETF analyst Eric Balchunas has tweeted.
An ETF is, in effect, a futures fund – so in this case, any SEC ruling on these would include bitcoin. However, the SEC has previously expressed concerns over bitcoin’s volatility as a basis for an exchange-traded commodity (ETC).
Nevertheless, the SEC has until the end of the day today to oppose the ProShares Bitcoin Strategy ETF, which will operate under the ticker name BITO and is scheduled to start trading on the New York Stock Exchange (NYSE) as of tomorrow, 19 October. Once that happens, we will know more, including the bitcoin futures price.
On Monday, ProShares CEO Michael L. Sapir said in a statement: "We believe a multitude of investors have been eagerly awaiting the launch of a bitcoin-linked ETF after years of efforts to launch one."
In case you want to know, an ETF is is a fund which tracks specific assets. In this case, the fund will track bitcoin futures. Previous attempts to set up a bitcoin EFT, albeit with BTC itself rather than with bitcoin futures, have been unsuccessful.
If the application is ultimately successful, it will mark the end of a long road for the campaign to have crypto ETFs approved by a federal agency. Social media pioneers Cameron and Tyler Winklevoss started working on a bitcoin futures scheme as far back as 2013.
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Speaking at the time, Tyler Winklevoss said: “The trust brings bitcoin to Main Street and mainstream investors to bitcoin.
“It eliminates the friction of buying and reduces the risks associated with storing bitcoin while offering similar investment attributes to direct ownership.”
However, crypto ETFs have not been recognised by the SEC so far.
What this means for bitcoin prices and other cryptocurrencies
What makes this reported decision so interesting is how it could have an impact on the price of bitcoin. Indeed, the bitcoin price has shot up in recent days, with the price at around the highest it has been for quite some time as speculation over the SEC and the ETF has grown market confidence.
It is fair to assume that, if the SEC does approve – or at least not block – the ETF from being traded, then that could make the price of bitcoin rise significantly. After all, one of the positives of the ETF involving futures is that it does reduce (if not fully remove) the risks tied up with cryptocurrency’s volatility.
Since the futures contract allows a price to be fixed for some point in the future, that means that the regular ups and downs we can see in bitcoin are mitigated agains – at least to a certain extent. This would encourage more people to get involved in bitcoin and, by extension, may open up possibilities for other cryptocurrencies to get involved as well.
However, even if they don’t, the crypto markets will have done well when bitcoin has done well. This would push cryptocurrency prices up and be a good thing for crypto investors of all sorts.
This bitcoin futures news could potentially be good for all cryptocurrencies, not just bitcoin. Indeed, the anticipation that the SEC could permit the ETF has seen bitcoin trading at over $60,000 for most of the weekend.
On the other hand, if the reports are not true and the ETF is not approved, then that would, in turn, be bad news for cryptocurrency as a whole. If bitcoin falters then, as we have also seen in the past, then the whole crypto market could take a hit, which could end up proving to be disastrous for many investors, especially if they have got involved as the result of the speculation surrounding the SEC’s decision.
Ultimately, we will have to wait and see what happens, including what the bitcoin futures price will be.
The SEC and cryptocurrencies
If this decision does go ahead, it will mark an interesting moment in the relationship between the SEC and cryptocurrency.
Recently, that particular relationship has been marked by lawsuits, with the commission currently embroiled in an ongoing and long-running court case with Ripple over whether the XRP cryptocurrency is an illegal security or not.
Earlier this year, the SEC released a statement advising investors to consider the risks carefully when investing in mutual funds exposed to the bitcoin futures market.
It said: “Investors should consider the volatility of bitcoin and the bitcoin futures market, as well as the lack of regulation and potential for fraud or manipulation in the underlying bitcoin market.
“As with any fund investment, investors should focus on the level of risk they are taking on, and the level of risk they are comfortable taking on, prior to making an investment.”
Can you trade crypto futures in the US?
You can – at least in theory – trade crypto futures in the US. However, at present, there have been no crypto ETFs approved by the Securities and Exchange Commission.
How to invest in bitcoin futures
You can invest in bitcoin futures with a futures broker and on a variety of exchanges. We don’t offer this feature on currency.com yet, but we will let you know when we do.
Remember, though, that you need to do your own research; that prices can go down as well as up; and that you should never invest more money than you can afford to lose.
How to sell bitcoin futures
You can sell bitcoin futures with a futures broker. Although you can’t sell them on currency.com yet, we will let you know when you can.