Is There A Future in Bitcoin Futures?

 

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Bitcoin futures have exploded in popularity since their launch, representing more than three quarters of all Bitcoin trade volume.

In brief

Bitcoin futures are a type of simple agreement contract to buy or sell Bitcoin at a specific price at a specific future date.

They have grown in popularity, with Bitcoin futures now representing more than 75% of all Bitcoin trade volume.

While Bitcoin futures volume is considered to be a key indicator of institutional interest in Bitcoin, the UK's FCA has banned some 

cryptocurrency derivatives for retail customers, including futures.

Since the launch of the first Bitcoin futures product in December 2017 by the Chicago Board Options Exchange (CBOE), they have exploded in popularity, and now represent more than 75% of all Bitcoin trade volume.

Now, Bitcoin futures volume is widely considered to be one of the most accurate indicators of institutional interest in Bitcoin. Since many of these products are regulated, they allow firms to gain exposure to Bitcoin without—in most cases—needing to hold the underlying asset, while the capacity to trade on leverage allows these firms to closely manage their risk profile.

Regulatory concerns around Bitcoin futures

Many Bitcoin products are regulated by the correct authorities, including CME's and Bakkt's Bitcoin futures, which are regulated by the Commodity Futures Trading Commission (CFTC) in the United States.

Advocates of Bitcoin futures argue that their emergence leads to more efficient price discovery—since traders and investors can now short Bitcoin just as easily as going long.

However, in the years since they first launched, Bitcoin futures have been frequently scrutinized by industry experts—many of whom argue that some of the platforms offering Bitcoin futures products are not compliant with relevant regions, while some may be operating illegally.

The lack of regulatory oversight on some Bitcoin futures platforms has led to accusations of market manipulation.

Matters came to a head in October 2020, when BitMEX—once the most popular Bitcoin futures exchange by trading volume—was charged with operating an unregistered trading platform, among other things.

Moreover, the United Kingdom's financial watchdog, the Financial Conduct Authority (FCA) recently announced a ban on certain types of cryptocurrency derivatives for retail customers, including futures and exchange-traded notes (ETNs)—signaling a potentially worrying trend among regulators.

Though the vast majority of this trading volume is accounted for by institutional investors, the increasing accessibility and simplicity of futures products, as well as the growing range of available educational materials, have helped make Bitcoin futures accessible to casual investors.

However, a wide variety of alternative derivatives products have begun to emerge as of late, some of which may prove more attractive to both institutional and retail traders. One of these alternatives includes Bitcoin options—a type of derivative product that is similar to futures but enables more complex trading strategies.

According to a recent report by crypto analytics platform Skew, Bitcoin options are rapidly catching up to Bitcoin futures in terms of trading volume and open interest, signaling rising interest among traders.