The 3 Reasons Why Bitcoin Futures Aren't Working

by Anthony     Jul 16, 2019

When Bitcoin futures were announced to be introduced to two American exchanges, Bitcoin prices skyrocketed to its record high of almost $20,000 in December 2017. The Chicago Board Options Exchange (CBOE) and Chicago Mercantile Exchange (CME) announced the beginning of Bitcoin futures while Bitcoin was valued at around $10,000 and days after the announcement, the currency hit its current record peak. Naturally, this sent everyone with a trading 101 background into a frenzy to understand the phenomenon.

This spike is a result of investors anticipating a bull market in the cryptocurrency sphere with Bitcoin leading the charge. Futures will allow bigger financial institutions to get into the trading game which will bring a higher level of liquidity and ideally, stability to the prolific cryptocurrency. From a cryptocurrency trading 101 perspective, this comes with plenty of pros and cons.

On the other hand, the move has garnered as much criticism as it has brought praise. Many critics believe the exchanges hadn’t spent enough time understanding the markets and had gotten feedback from current participants before deciding on important aspects such as margin trading levels and overall price limits.

Let’s have a look why the new Bitcoin futures aren’t working out as intended.

  • 1) Trading Profits Are Reduced

One of the direct effects of the stability that futures and the companies behind them are meant to bring is stability, which can significantly cut into the profit margins that Bitcoin investors have been enjoying in 2017. The price limit was set at 20% above or below whatever the current reference price is. A 20% price swing in either direction is not a huge of a deal in the world of Bitcoin, with some days having seen significantly larger drops and gains.

The idea is to stymie the potential impact that massive swings could have in the futures market. Traders using the futures won’t be benefitting from spikes larger than 20%, which is what Bitcoin is actually all about as of late. This is almost counterproductive to the nature of investing in futures in the first place and is going to be unattractive for a lot of investors.

  • 2) Bitcoin Futures Are A Risk

The nature of risk colors the entirety of the concept behind trading Bitcoin in the first place. Due to the volatility, traders can make back their losses after a significant dip in a matter of days, making comeback stories a real thing in the cryptocurrency world.

With the introduction of futures, the systemic risk is increased. The 20% price limits could hypothetically crash the entire market if all the futures investors decided to sell off their contracts at the same time as it becomes more difficult to make comebacks and holding becomes less attractive.

  • 3) Cryptocurrency Exchanges Are Volatile

Cryptocurrencies are largely unregulated at the time of writing. The exchanges where Bitcoin and its many off-shots are traded are also unregulated and potentially subject to manipulation or other things that regular exchanges are protected from.

One easy example is when Coinbase and IG Group stopped the trade of Bitcoin through their platforms when Bitcoin hit its pricing peak. Traders rely on exchanges to be able to place their orders and conduct their business, and this can be come difficult with unregulated exchanges.

Another good example is the story of Coincheck, a Japan-based crypto exchange. They were target of a large hack that resulted in millions of dollars’ worth of Bitcoin tokens being stolen by hackers. Exchanges vulnerable to these types of attacks are just one of the reasons why prices spike up and down so quickly, which won’t do well with the way the CME and CBOE Bitcoin futures are structured.

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