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The Futures of Bitcoin

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For those who are new, my name is Jeremiah. I’m not a cryptocurrency expert, nor am I an economist. I
 

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December 13 · Issue #5 · View online
Weekly curated #cryptocurrency news and commentary.

For those who are new, my name is Jeremiah. I’m not a cryptocurrency expert, nor am I an economist. I am an enthusiast who believes that cryptocurrency and its attendant technologies are the prelude to a Cambrian explosion of innovation in “real/cyber-space,” where the digital and physical worlds meet.
This is a weekly email digest comprising a short topical essay about the crypto-space, followed by a manageable collection of curated links.
If you know anyone who’d be interested in this kind of content, they can subscribe here. I’ll be playing around with the format from week to week to see what I like best, and I love feedback, so don’t hesitate to email me.
Without further ado, let’s jump into this week’s topic.

Song of the Week
The Future's So Bright, I Gotta Wear Shades
The Futures Are Now, and They Are Bitcoin
On December 10, 2017, the Chicago Board Options Exchange released a futures contract for Bitcoin, another first for cryptocurrency, and the beginning of a new stage of mainstream acceptance for Bitcoin, if not cryptocurrency as a whole.
But what are futures? And why should this be such an important event?
A Quick Primer
Jane is bullish on Bitcoin. She thinks it’s going to be worth a lot more on March 13, 2018, so she places a three-month futures contract with Bob in which she agrees to the price of Bitcoin at $17,000 (called the settlement price). Meanwhile, Bob thinks Bitcoin is going to crash in three months. He wants to lock in profit at $17,000.
The two traders agree to settle the difference between their price speculation in three months and what Bitcoin actually is at that future date. So Jane gives Bob an initial percentage (called futures margin) of $17,000 now in hopes that in three months, Bitcoin will be worth more so Bob will have to pay her the difference. Bob, on the other hand, wants the price to fall.
Some contracts allow shipment of physical goods (like oil, wheat, or pork) to settle the difference in spot price (the purchase/sale price of the contract) from the actual price once the future is realized. Other contracts allow for a cash settlement. Bitcoin futures on the CBOE are cash settled, meaning if price goes UP, say, to $20,000, Bob will give Jane $3,000 ($20k-$17k=$3k to Jane), which she can then choose to purchase a Bitcoin or not. If it falls to $15,000, Jane would owe Bob $2,000 ($15k-$17k=$2k to Bob).
This means traders aren’t necessarily buying Bitcoin at all, but rather they are purchasing or selling the price of Bitcoin and pocketing or losing the difference.
Futures contracts can be bought and sold at any time during the life of the contract, and buyers inherit the obligations of the contract. There’s lots of ways in which futures can be used, either as a hedge against risk or as a bet for aggressive profits. I recommend reading more about it to get some additional ideas on how the futures market can work specifically in relation to Bitcoin. It’s pretty fascinating!
The Big Short
In the real world, Bitcoin futures contracts are for 5 Bitcoins, and there is a minimum of 5 contract blocks per, so at $15,000 per Bitcoin, the smallest contract is $375,000. This means only big, institutional investors are going to be playing this game. 
The only groups with enough cash to trade these new futures markets are institutional capital, which has been notoriously and overwhelmingly opposed to Bitcoin’s rise, and now they can short at scale on an exchange without ever having to purchase Bitcoin itself!
This led some to speculate about the possibility of Bitcoin’s price being shorted by institutions and individuals who are bearish and incentivized for a devalued Bitcoin (think Jamie Dimon of JPMorgan or Warren Buffett of Berkshire Hathaway).
On the other hand, for every bear there may well be at least one bull willing to bet that Bitcoin’s future is bright (enough to wear shades?).
The Big Push
So what happened? More futures contracts were sold than was expected (nearly 4,000). At one point trading was so hot the exchange website crashed a few times. But otherwise, the Big Short never occurred. Futures speculation fueled an upward price swing, ending the day at $18,545. The price of Bitcoin on currency exchanges also rose.
Of course, getting in is easier than getting out, so the big test will be in January, when the first main CBOE contract expires.
But the first link to “big money” has been established, and Bitcoin futures contracts will arrive on four other big exchanges in the next month. This seems to me to be a sign that Bitcoin is slowly but surely gaining mainstream acceptance, winning over formerly cautious investors.
What the future of Bitcoin will look like is still uncertain, but if the speculations market is any indication, we’re still in for a significant ride.
Where we're going we won't need...fiat currency.
Where we're going we won't need...fiat currency.
Links of Note
Bitcoin futures soar in new trading
People are taking out mortgages to buy bitcoin, says Joseph Borg
Everything You Want to Know About Blockchain (But Were Afraid to Ask)
This New Blockchain Project Gives Homeless New Yorkers A Digital Ident
How to Discuss Bitcoin Without Sounding Like an Idiot
Three Types of Crypto And How To Value Them
With Bitcoin Prices Rising, Here's What You Need To Know To Be In The Loop | Coin Clarity
Due Diligence Checklist for Investing in Cryptocurrency
Wrap up
That’s it for this week. Thanks again for reading. If you find this newsletter useful and interesting and you think someone else would enjoy it, please forward it to them. You can always subscribe or read back-issues here.
If you want to get started with Bitcoin or one of the two major altcoins (Ethereum and Litecoin), sign up for a free account on Coinbase. Once you buy or sell $100 or more of digital currency, you’ll get $10 of free Bitcoin.*
That’s all for this week. Thank you again for reading. Please send me any articles you think would be good for future newsletters. If you have any questions you’d like addressed, feel free to contact me. I do respond to everyone who writes me.
* This is a referral link, so I’ll also get $10 for any eligible signups.
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