Earlier this month, the Chicago Mercantile Exchange, or CME for short, announced their intentions to offer bitcoin futures. Following this announcement, bitcoin prices launched upwards to new all-time highs of over $7500.
While the high price may not have lasted for more than a few days (due to the SegWit2x debacle), the announcement shows that futures trading could have a major impact on bitcoin valuation. The question is, what are futures, and how will this affect bitcoin in the long term?
Understanding futures and derivatives
Futures, or more specifically, futures contracts, are a type of investment that belongs under the label derivatives. A derivative in the simplest terms is an investment that gets it’s value from something else, for example, gold or silver prices. Or in our case, bitcoin prices.
A futures contract is where an investor makes a bet that a certain commodity will go up in price over time. If the price falls, then naturally the investor will lose money. A bitcoin futures investment would likewise be based on the future price of bitcoin.
While this isn’t the first time bitcoin futures have been offered, the announcement from CME was an important one. This is because CME is the world’s largest options exchange platform. CME getting involved in bitcoin is a signal to the traditional financial world, and the SEC, that bitcoin is serious business. Bloomberg also declared this announcement as signs of bitcoin maturing.
Traditional finance meets cryptocurrency
Other investment companies are trying their best to connect the cryptocurrency world with traditional investment markets at faster and faster rates. Earlier this week, Grayscale Investments announced its intention to list shares in its Ethereum Classic Investment Trust. The company had previously listed shares for its Bitcoin Investment Trust and they already hit the market earlier this year.
In addition to futures, several companies and groups including the famed Winklevoss twins have made attempts to get a bitcoin-based ETF or Exchange Traded Fund listed. Their efforts were not met with success, however. Oddly enough the SEC stated that if an established futures market were to exist, they would reconsider a bitcoin ETF.
This has led some market analysts to believe that a bitcoin ETF may soon be within reach, now that CME is getting involved in bitcoin futures.
Long-term impact on bitcoin and cryptocurrency
What we have seen so far is that attempts to combine the traditional investment world with cryptocurrency have generally had a positive effect on bitcoin valuation. It can also have a negative effect, as was seen when the previously mentioned Winklevoss ETF was denied. The effects overall, however, have been largely positive.
What we will likely see next is two-fold. First, we are almost certainly going to see more investment products that involve cryptocurrency in some form. This will continue spreading increased awareness and a growing understanding of cryptocurrency. To what extent though, and how quickly, is yet to be seen.
Second, we are going to eventually start seeing more and more cryptocurrency investment vehicles that are tied to other crypto assets. Just like the previously mentioned ETC Investment Trust, there is no doubt that we will soon see Ethereum, Litecoin, Dash, and other assets getting included in these sorts of traditional investment classes.
From there, it only makes sense that further ETF’s will be created that may include various different crypto assets into one fund. This would be much in the same way that an index fund represents diversified investments across many companies.
Featured Image via Bloomberg