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How Will Bitcoin Futures Affect the Price of Bitcoin?

On December 10, 2017, the Chicago Board Options Exchange (CBOE) was the first U.S.-based derivatives exchange to launch the trading of bitcoin futures contracts. A week later, on December 17, the Chicago Mercantile Exchange (CME) followed suit and launched its own bitcoin futures contracts after the U.S. Commodity Futures Trading Commission (CFTC) approved the trading of this new investment vehicle.

Even before the newly listed bitcoin futures started to trade, the price of bitcoin rallied following the news that two leading derivatives exchanges, the CME and the CBOE, were planning to list regulated bitcoin futures contracts. In fact, in the weeks to follow the announcements, the price of bitcoin more than doubled. The primary reason for that is that bitcoin can now be invested in by an entirely new investors group with very deep pockets; institutional investors.

The majority of institutional investors, such as mutual funds and pension funds, have so far not been able to invest in bitcoin as they can generally only invest in regulated financial securities and derivatives. Through the introduction of officially regulated bitcoin futures, however, any fund that is allowed to invest in futures as part of their internal investment guidelines is now able to gain exposure to bitcoin.

In light of the low yields in the bond markets, disappointing returns in the commodity markets, and an overheated equity market, uncorrelated assets such as digital currencies offer a fantastic opportunity to diversify as well as add potentially high returns to one’s portfolio. Hence, investors believe that the listing of bitcoin futures will push the price of bitcoin to never before seen highs in the years to come.

Alternatively, bitcoin futures also allow investors to bet against the price of an asset. As there are many investors on Wall Street who believe that bitcoin will go to zero, there will likely be a lot of “shorting” of bitcoin futures. This has also been witnessed in the days to follow after the listings in December. The more people on Wall Street place short bets on bitcoin, the more you will hear them talking down the price of bitcoin in the media. This will likely increase volatility in the coming months.

The ability to short bitcoin futures, however, also introduces a major benefit to funds who want to buy bitcoin as a small holding in their portfolio as it allows them to hedge part of their bitcoin exposure to reduce the overall market risk of investing in bitcoin and digital currencies.

While bitcoin futures will most likely introduce more volatility into the market, for the simple reason that billions of institutional investor funds now have the option to diversify into bitcoin as well as short the digital currency, we will likely witness a continuance of last year’s bitcoin rally in 2018 as the overall sentiment is positive towards this new digital asset class.

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