A Brief Introduction to Bitcoin Contracts: Prosperous Derivatives Will Pave the Way for Institutional Investors to Enter
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Carbon chain value
(ID: cc-value), Author: Hydrogen 3, Editor: Tang Han, reproduced by Odaily with authorization.
So what is a futures contract? Why do people use it? What is the difference between futures contracts and leverage? Who will be the next king of the futures exchange? This article will answer these questions.
Friends who are interested in the Bitcoin derivatives market can regard this article as an introductory article.
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What is a futures contract?
The financial derivatives market is a derivative of the financial market, mainly including futures contracts (Futures Contract) or options (Option) and other instruments. The derivatives transactions of digital currencies (mainly Bitcoin) are mainly based on futures contracts.
A futures contract is a standardized forward "contract," an agreement to buy or sell something at a predetermined price at a specified time in the future. In the Bitcoin contract market, it is mainly divided into two types: "term contract" and "perpetual contract".
Compared with the fixed-term contract, the perpetual contract has no expiration date, no delivery settlement and the price is almost the same as the spot price (basis is 0).
Bitcoin futures price = Bitcoin spot price * [1+ risk-free interest rate (remaining delivery date/365 days)]
Therefore, it can be found that the closer the contract is to the delivery date, the closer the price is to the spot price.
Bitcoin price of contracts with different delivery dates at the same time
Since it is difficult to accurately price digital currencies, contracts that are far from the delivery date generally reflect market expectations in the form of the difference between the spot and futures prices. The spot price is higher than the futures contract price, and investors are generally not optimistic about the market outlook. The spot price is lower than the futures contract price, and investors are generally optimistic about the market outlook. Of course, the price difference only reflects the market sentiment, and what can really change the price of the futures contract is the rise and fall of the spot price.
Take the 20x leveraged Bitcoin contract as an example, assuming that the price of Bitcoin is $100. Open a long position with a full position, and when the price of Bitcoin rises to $105.2637, a net profit of 1 Bitcoin is made; when Bitcoin falls to $95.2381, the principal is lost. It is the opposite to open a short position with a full position.
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Target audience: speculators, hedgers, alternative hoarders
Futures contract traders are generally divided into two categories, one is speculators and the other is hedgers.
In traditional commodity markets, futures contract traders are mostly hedgers. Hedging is mainly to buy and sell the same commodity in the spot market and the futures market in equal quantities but in opposite directions, so as to minimize the risk.
There is often a thin line between hedging and speculation, such as Cathay Pacific (not only conducting futures contracts but also options) is a typical example. Fuel accounts for a large part of airline costs, so most airlines will hedge on fuel to control fuel costs. Before 2015, Cathay Pacific made gains from hedging and tasted the sweetness, so it increased its position. Normal airlines only hedge 10% to 20% on fuel, while Cathay Pacific has reached 60%. Large positions and misjudgment of direction resulted in a four-year loss of 24.2 billion yuan.
Normal hoarders use fiat currency to exchange for digital currency, which means that only by investing in a steady stream of fiat currency can the number of digital currency increase. But for those who calculate based on digital currency, futures contracts have an advantage: when the price of digital currency fiat currency rises or falls, you can get more digital currency by going long or short.
For example, a tycoon in the industry bought 2,000 bitcoins in December 2018 and opened long positions with 2x leverage. Now that bitcoins are priced at $10,700, the profit is at least 2,500 bitcoins. (Please note: it is 2 times leverage. If you open 20 times leverage like retail investors, 2000 bitcoins would have been liquidated long ago. Carbon chain value reminds readers to pay attention to risk control in the derivatives market.)
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How is leverage different from futures?
Any digital currency exchange that has a futures contract market will generally open leveraged trading. What is the difference between the two, and what are the similarities?
The biggest difference between the two is the market. Leverage trading exists in the spot market, while futures contracts are an independent market established by exchanges. Therefore, the futures contract markets of different exchanges may have large differences in short-term market conditions (such as pin insertion).
Secondly, leveraged trading is to magnify the principal multiple, while futures contracts are to magnify price fluctuations. At the same time, there are also differences in transaction costs between the two. Leveraged transactions generally charge interest on a daily basis, while leveraged transactions are generally only charged when buying or selling (or delivery).
From a speculative point of view, the similarity between the two is the use of small funds for excessive speculation, which expands risks while expanding returns.
There is no absolute advantage or disadvantage between the two methods, and at some point, the two can be used in combination. Choose the method that suits you best and has the highest odds is the best investment tool.
The Next Futures Exchange King
As far as Bitcoin futures contracts are concerned, BitMEX is currently the well-deserved leader. The trading volume of Bitcoin futures contracts on BitMEX accounts for more than 60% of the global Bitcoin futures contract transactions. This is one of the reasons why BitMEX has recently been targeted by US regulators.
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But can BitMEX always occupy the top spot of the boss? At present, it is difficult.
On July 19, Bloomberg reported that the U.S. Commodity Futures Trading Commission (CFTC) was investigating BitMEX. In the absence of obvious abnormalities in the inflow and outflow of bitcoin on other exchanges, BitMEX had a net outflow of $73 million in bitcoin that day. And up to now, it has been in a state of daily net outflow (as shown in the figure, the purple column is longer than the green column).
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Image source: TokenAnalyst
Coincidentally, Bakkt, a subsidiary of ICE, the parent company of the New York Stock Exchange, conducted a futures acceptance test on July 22. At the same time, the CFTC gave Bakkt the green light, and the New York Financial Services Authority (NYCFS) also granted a "custodial" license. This means that Bakkt's bitcoin futures contract business is ready to go. There is a hint of a regulatory layer suppressing BitMEX to help Bakkt open the way.
Bakkt's trading consists of three parts: ICE Futures US (futures trading), ICE Clear US (clearing) and Bakkt (custody). Bakkt is currently BitMEX's most powerful opponent foreseeable, because both use Bitcoin for physical delivery and settlement.
At the same time as Bakkt entered the game, institutional investors also showed unprecedented interest in cryptocurrencies, especially Bitcoin. However, the volatility of Bitcoin is too large, and a prosperous derivatives market that can provide robust hedging tools will be a prerequisite for certain institutional investors to enter the market. The appearance of Bakkt just paved the way for their entry.
