How Bitcoin Futures Affect BTC Price

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Bitcoin
How Bitcoin Futures Affect BTC Price

Bitcoin futures do not directly affect the price of Bitcoin. It, however, does not mean that they do not weigh on the price of Bitcoin. Let’s look into the details.

Defining Bitcoin Futures

Bitcoin futures is a contract between two traders that mandates one of the traders to buy or sell Bitcoin at a specific time, quantity, and price in the future. They allow investors to have exposure to Bitcoin but without actually holding the cryptocurrency. 

For example, the Chicago Mercantile Exchange (CME) gives monthly contracts for cash settlement, meaning that an investor takes cash instead of Bitcoin when the contract is settled. Bakkt and Intercontinental Exchange, on the other hand, offer not only monthly but also daily monthly Bitcoin futures contracts and on physical delivery where investors receive Bitcoin instead of cash.

Bitcoin Futures and Bitcoin Price

Bitcoin futures became known widely in December 2017. More companies are now opening up to the idea of Bitcoin futures and are looking into providing them. So, how could Bitcoin futures affect the price of Bitcoin?

Liquidity and Stability

With increased Bitcoin futures provision, Bitcoin is becoming more available to huge players hence driving a lot of money into the Bitcoin market. The reasoning behind this is that Bitcoin futures traders do not own Bitcoin wallets or addresses; hence it will increase retail and investor volumes.

Given that traditionally managed assets dwarf the crypto firms’ current assets, increased demand from hedge funds can lead to higher prices on a bull market and lower on a bear market. A small percentage of the people will have a say in this case.

Similarly, futures allow prominent players to get into the market without hesitation, and hence the amount of money getting into the market increases creating stability in the Bitcoin market.

Arbitrage

Bitcoin prices vary from exchange to exchange based on events, order book demand, among other factors. When there is a significant enough price difference, a trader could buy BTC on one exchange at a lower price and sell it on another exchange at a higher price – arbitrage.

The price of bitcoin for CME futures would probably increase if someone purchased several future Bitcoin contracts from CME. It does not move the Bitcoin spot prices immediately, although avid traders will purchase or sell Bitcoin spot at a reduced price, which will lead to a simultaneous increase in the spot price. This notion works for a series of CME-BTC scenarios.

Shorting Bitcoin

Another interesting contribution to the price is shorting Bitcoin. Many people watch the futures market in a bid to measure the sentiment. 

Shorting Bitcoin is whereby one sells the crypto at a high price and buys back at a lower price once a correction occurs and the price drops, the trader gains from the price movement between the time of selling and purchasing back.

When many people are short Bitcoin, this shows a negative sign of massive selling from observing the futures market.

Despite how good it sounds, shorting comes with a lot of risks. When shorting and the price doubles, you could lose a lot more in a bull market. On the other hand, the bear market will act in your favor.

Hedging

Most investors are going into Bitcoin futures to get a hedge against volatility associated with Bitcoin. In an event where you buy a futures contract, you immediately know what you are risking and how much you stand to lose or gain. 

Bitcoin miners could choose to sell futures so that their income becomes more predictable. With the large mining bills spent on machinery and electricity, having a predictable cash flow is a significant plus.

As the futures market keeps growing, we can expect more possibilities of there being more possibilities of making more price changes.

Wayne Jones

Wayne is an all-rounded cryptocurrency writer who has written for several publications in the fintech industry. Having graduated from the University of Essex Colchester, he developed a passion for blockchain technology and has been curious about how the blockchain can modify the traditional financial industry.