How to Prepare for BTC Futures

Posted by Josh Blatchford | Bitcoin

Two weeks ago, we posted here on the Magnr blog about the announcement of the soon-to-be-issued Bitcoin futures contract on the Chicago Mercantile Exchange. Institutional money now has an easy way to get into and hedge their positions in Bitcoin. It’s a big deal.

A large UK hedge fund, the Man Group, has already announced that they will be investing part of their $100 billion USD under management in Bitcoin if the Merc issues these futures contracts.

Interactive Brokers, who is a clearing member on the Merc, has some serious concerns about how the exchange will calculate margins (deposits) left at the exchange for a crypto that’s volatile. Their chairman states that calculating a margin for a short futures trade on BTC will be ‘nearly impossible’. Margins on futures are related to volatility more than any other factor. Bitcoin is more volatile than nearly everything else that trades at the Merc despite Bitcoin’s volatility declining over the last year or two. Bitcoin’s lowering volatility is a trend we’ve seen and here is the last 12 months from the Bitcoin Volatility Index.

The light blue line is Bitcoin hovering at or below 5% volatility for the last 12 months with the highest volatility in mid-July to mid-August, which coincides with the Bitcoin Cash fork. We also see a slight bump above 5% from mid-September to mid-October.  The darker blue line with greater volatility is Litecoin.

According to Business Insider, the initial margins at the Merc, are set at 30% collateral. Don’t expect it to stay there. We expect the margin requirements will be higher and then come down as Bitcoin’s volatility declines.

Remember these futures are cash settled so a hedge fund does not have to set up their own wallets to buy, sell and trade Bitcoin, making it easier for them to access and trade.

What to Expect

You should expect that Bitcoin’s spot price, which is the current trading price, will get less volatile over time thanks to the futures contract. Along with less volatility, some other things to look out for include

  • More Spread trade activity. Trades like long BTC spot price but short BTC futures or short BTC spot price and long BTC futures
  • More liquidity. HODLers now have a way to participate in short-term swings without selling highly profitable long BTC and creating the taxable event (capital gains tax in the US) for themselves that would result from the sale
  • More Institutions. Institutions will start to make a market in Bitcoin through futures and some market makers could get big enough to move the market on light trading days
  • Up to 20% swings in futures prices. This is the initial limit above and below the previous day’s settlement price, per the Business Insider piece.
  • More adoption. Businesses of all types can more easily accept Bitcoin as payment if they can lock in a future price on it to lower volatility AND help them with the revenue recognition their accountants and taxing entities like the IRS will require
  • Less Volatility than Other Coins. Other coins will have more volatility than Bitcoin. See chart above for Litecoin and many other alts including Bitcoin Cash, Ripple, and Ethereum could see higher volatilities than BTC moving forward.

Magnr clients are in a position to take advantage of spread trades since you can use leverage on your Bitcoin trades on our platform AND there’s leverage on the futures contracts too. For a small amount of money, you can control a healthy amount of Bitcoin on the exchanges for current delivery (spot) or delivery at a future date (futures).