There are many uncertainties when it comes to the impact that Futures will have on the price of Bitcoin.
There are a range of opinions that people have. Some are of the view that it could give large institutional investors the chance to short the price extensively which could cause it to crash.
There are others who think that the impact will be very positive as demand from institutional money for Bitcon will soar given the legitimacy of the CME name.
However, one of the most well-known names in the sector, Andreas Antonopoulos came forward with his own professional opinion of the likely impact.
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CME Oversight Position
When asked the question by one of the audience members, Andreas mentioned that he had previously taken a position on the oversight board of the Chicago Mercantile Exchange (CME). The CME is one of the exchanges that will be listing the Bitcoin futures on the 18th of December.
Andreas said that the role he would have is an advisor over the exchanges that will be used to pull the pricing data. This was indeed quite an important as having the correct reference point of the price is vital for the contract.
In this case, Andreas said that there would need to be two Bitcoin reference rates in order to properly construct the contracts. One would be the Bitcoin Real Time Index which is the spot price that is updated every 30 seconds.
The other is the something called the “Point Price” or moving average price. This is measured every day at 2pm CT. This point price is that price of Bitcoin at the end of the day.
Both of these prices are used in the legal framework of the futures contracts. They will also be used to address any disputes that there may be between the two parties.
Technicalities of CME Futures
Andreas went on to explain the criteria that the CME would use in order to determine whether an exchange is eligible for pricing.
The exchange needs to publish the data constantly in order for the CME to trust the pricing. Secondly, it also has to have some trading fees in place. If there are none, then the markets are susceptible to automated trading that can inflate levels.
The Futures contracts are also cash settled. This means that there will be no physical delivery of any Bitcoin. Hence, there will need to be a corresponding long position for every short position that is on the exchange. Both the long / short positions have to be capitalized in USD against the CME to ensure proper collateralization.
There will also be “circuit breakers” or hardcoded stops in the exchange’s system that will halt the trading if the price of Bitcoin moves by more than 7% during the day.
We have previously covered the technicalities of the Bitcoin CME contracts and how the circuit breakers will work.
Who will Participate
Andreas also ventured some guesses as to who would be using the contracts to short Bitcoin. Given the risky nature of Bitcoin, it is unlikely that financial institutions such as hedge funds will be shorting them
However, mining businesses may be active participants. This would be done in order to hedge the risk that they face from the Bitcoin price / cash flow perspective.
The cashflow problems for the miner is the electricity costs that they may have to pay for the upcoming quarter. If the price of Bitcoin is greatly below expectations, this could throw the miner’s financial calculations out of whack.
In his example, Andreas predicted that Miner’s were likely to take out about 10% of their position in Bitcoin. If the price of Bitcoin then rallied, they could benefit from the price increase on their physical coins even though they lost in their futures position.
There may also be other options for miners through the use of Bitcoin options. At companies such as LedgerX, these miners could then benefit from the all the upside and take a full hedge on their entire Bitcoin exposure.
Most Likely Impact
The most likely impact from the introduction of the futures is that there will be a massive increase in the volume of Bitcoin that is traded.
Apart from the recognition that comes from having a Bitcoin future on the CME, it will allow large institutional investors to effectively hedge positions from volatility.
The end result could be a large decrease in the volatility and hence more adoption which will feed a positive feedback loop.
Featured Image via Antonopoulos.com