Bitcoin futures are set to go live on CME (Chicago Mercantile Exchange) on Dec 18, 2017. How will th

just some random thoughts ....
Bitcoin futures are set to go live on CME (Chicago Mercantile Exchange) on Dec 18, 2017. How will this affect Bitcoin?

Lets start with the basic idea of a futures contract to for context. If a company wants to build lets say a bridge that will take 3 years, they need to know their cost of materials in order to finance the project. Since steel prices can change, futures provide a way to contract for future delivery of steel at a set price, so even if the market price of steel changes, their costs do not.

There is a key point here to keep in mind. This is a contract for future delivery of material, but futures have morphed into a speculative derivative that allows for never taking delivery and simply trading the contract for more or less than you paid for it based on the market price of the product, and I believe many markets have grown into selling contracts where delivery is not even possible. More future delivery contacts are written than can physically be delivered, so it's a pure speculative derivative. I assume the contracts include a clause that allows them to be settled in dollars rather than the actual material. Bitcoin futures would have to have such a clause as few coins cold actually be delivered.

There are those that believe the price of gold and silver are held artificially low by the futures market. I have not looked into this closely enough to have an opinion, but in theory, why would some one pay $5000 an ounce for physical gold if they can buy a contract for it at $2000/ounce? The same mechanism could come into play with Bitcoin. Conspiracy theorist might say this is the banks getting control over the bitcoin value without having to even get into the game.

But there are other ways it could play out. If bitcoin keeps increasing in value, people writing futures contracts (Sellers) would lose their shirt selling contracts too low, so they would have to raise their price which further supports the market price of bitcoin and may even drive it up.

And, if the contracts do not include a clause to settle in cash, demanding actual delivery on contracts could cause quite a rush of purchasing to fulfill contracts which could drive the price insanely high.

And what would happen if a large number of contracts that are not fulfillable are written and buyers demand delivery? Could it break the futures market? (I doubt they would create contracts that could accomplish this).

Sign In or Register to comment.