So, Just How Useful Are Crypto Futures?

FinTech, Investing, News, Regulation | May 15, 2018 By:

It’s been five months since the launch of bitcoin futures on the CME and CBOE, and the cryptocurrency world is still figuring out what to make of these instruments.

For all of the hype around these futures and the potential to open the cryptocurrency trading floodgates, volumes haven’t exactly popped. Most market participants will agree that crypto futures are still a ways away from realizing their potential.

Muted volumes don’t mean that cryptocurrency futures are falling flat, however. In fact, when compared to the growth trajectory of new futures products launched over the last few decades, cryptocurrency futures volumes may very well be on track.

History shows that most futures contracts that exchanges launch will fail. For those that succeed, it typically takes a large macroeconomic event, or two-to-three years of small, steady gains in volume before larger institutions join the fray and send activity spiking. Crypto futures volumes are slowly but surely increasing. And as the recent launch of a cryptocurrency trading desk at Goldman Sachs shows, major institutions are circling the market.

But institutional malaise isn’t all that’s holding the crypto futures market back. It’s also the way that these futures have been structured, which has made them relatively prohibitive for everyday cryptocurrency holders.

Individuals hold a sizeable amount of cryptocurrency assets that could be catalyzed for futures investment. Yet for now, exchanges have set up futures contracts in a way that make them quite expensive for anyone but the largest traders. The current batch of contracts also feature arcane settlement procedures that further complicate things.

The same institution-friendly but individual-unfriendly thinking has also manifested in how the marketplace discusses and promotes these futures. Most of the conversation around cryptocurrency futures has focused on making institutions comfortable with the idea of Bitcoin, rather than the potential benefits for everyday cryptocurrency holders. This has left many curious individuals uncertain about how futures can be useful for them.

For everyday cryptocurrency holders, futures have the potential to transform how they access cryptocurrencies and put their crypto holdings to work. In a marketplace where buyers and sellers have been essentially limited to two options – HODL or sell – cryptocurrency futures open the door to new opportunities.

Take shorting, for example. Before futures, anyone who thought that a specific token was overvalued had little way to put that theory into practice. Now, retail cryptocurrency investors can invest in a futures contract that profits when the price of a token goes down. Futures contracts don’t require you to hold the token either, eliminating the cost and potential restrictions of borrowing coins to short sell.

Conversely, anyone who holds a sizeable amount of a cryptocurrency can use futures contracts to help protect that position. This is very beneficial to an investor who believes that the price of a cryptocurrency will go up over time, but doesn’t have the flexibility to weather a choppy market in the short term.

For someone with long-term aspirations that bought bitcoin at $20,000 in December, a well-timed futures trade may have preserved much of that initial investment value as the market went into its slide, enabling them to avoid any acute pressure to sell and cut losses.

In addition, cryptocurrency futures reduce the intensive upfront capital costs of investing in some of the more popular coins. Futures are traded using margin, which means that you don’t need to have 100% of the capital usually required to take on a particular position.

For example, you could buy a contract that is worth 10 bitcoin or 100 ether and would only need to post a fraction of of the total value as collateral in order to hold the position. This method is known as ‘leverage’ – and while it can be powerful, it can also magnify losses. When respected and handled with care however, leverage can help individuals diversify their crypto holdings, adding depth to their strategies and offering a better way to manage risk.

Futures also serve as a bridge between cryptocurrency markets and the more traditional financial markets. As more exchanges list futures in both cryptocurrencies and asset classes like equities, commodities or currencies, individuals will be able to easily and efficiently deploy their capital across markets. With the appropriate arrangement, cryptocurrency holders will be able to use their coins to access real assets, sans fiat. At the moment, transferring crypto to fiat remains one of the largest barriers-to-entry for crypto traders seeking to invest in other markets.

The list of benefits for everyday cryptocurrency holders goes on. And the appetite to find a meaningful solution and venue for individuals to realize these benefits is growing. From talking to hundreds of individuals around the world in recent months, we’re seeing growing interest and support for solutions that make futures more accessible to existing crypto holders. This is especially true among the first generation of crypto buyers who have reaped vast earnings and are looking for ways to put their assets to work.

For futures to really take hold, the marketplace will have to do more to demonstrate the value of these instruments for everyday cryptocurrency holders. Institutional participation may make the rest of the financial world comfortable with cryptocurrencies, but it will be the retail community that ultimately drives this market forward.