Posted By: Ilan Levy-Mayer Vice President, Cannon Trading Futures Blog
Commodity trading has become a “niche area in the finance world that…has been gaining more interest among individuals who are seeking alternative trading instruments from the usual stocks and bonds,” says Timothy Ho, economics/finance professional.
Commodities categories include precious metals, oil and gas, and soft commodities (cocoa beans, coffee, sugar, wheat, etc.). Some commodities are considered “the fifth asset class,” and they can include cash, equities, and property.
A futures contract settlement will occur in the future but traded today. There are also spot contracts that settle immediately called “spot contracts.” Most investors work with a commodities futures broker, someone who understands your financial portfolio goals and can place trades for you for a relatively small fee on futures contracts for your account
Some of the risks of futures trading include:
- Exchange rates
- Geo political events
- Supply and demand
- Leverage and technicals
- Price fluctuations
What are Bitcoins?
Bitcoins are the first global decentralized digital currency, which is one of many “cryptocurrencies” or a “virtual currency.” Cambridge University says 2.9-5.8 million people are actively using a cryptocurrency “wallet,” and it’s more than a fad. “Currently, the combined market value of all cryptocurrencies is nearly $40 billion,” says Dr. Garrick Hileman, Research Fellow at the Cambridge Centre for Alternative Finance (CCAF). “The advent of cryptocurrency has also sparked many new business platforms with sizable valuations of their own, along with new forms of peer-to-peer economic activity.”
Trading in Bitcoins Futures
In November 2017, Cannon Trading Futures Vice President Ilan Levy-Meyer wrote, “The hot market for today is definitely Bitcoin. While we don’t have a future contract YET to trade, it is close and the CME does have the “underlying asset” which will be the Bitcoin Index (More information will come out soon.).” The company included a Bitcoin Index Futures chart for traders to review.
Also in November, the CME Group announced:
Effective Sunday[,] 10 December 2017 for trade date Monday[,] 11 December 2017, and pending all relevant regulatory review periods, please be advised that CME will launch Bitcoin Futures.
It later revised the prediction to read Q4 2107, “pending all relevant regulatory review periods.”
On Your Mark, Get Set…Bitcoin Futures Exchange Soon Open for Business
Many investors are concerned with the additional risk of investing in Bitcoin cash futures, with good reason. The value of Bitcoins has risen and dropped like a roller coaster. The reasons seem to be:
- Lack of confidence in this new commodity
- It is somewhat shaky reputation
- Its dramatic reaction to bad news
- No short selling allowed
Knowing that a futures contract is a tool to hedge positions and lower risk, including spot contracts, traders will assume Bitcoin futures and options will work the same way as other futures contracts. It will, except that when you buy Bitcoin cash futures, they are associated with “miners,” who also share the risk of unknown Bitcoin futures prices.
Fast Facts: Bitcoin Mining
- Basically, Bitcoin mining is puzzle-solving.
- Bitcoin mining is the way Bitcoins are released and the transactions recorded (the “block chain”).
- The puzzle-solver gets to place the next block on the block chain and claim the reward, which includes the transaction fees and the new Bitcoin.
- The amount of Bitcoin released with each block is the block reward. It is halved every 210,000 blocks.
- Anyone with the right hardware and internet access can participate in Bitcoin mining.
Here’s an example of Bitcoin futures options symbols:
The exchange rate between Bitcoin and the U.S. dollar might look like this: BTC/USD-3.14. (“3” is the month [March] and “14” is the year  . The trading symbol for the same instrument will be BUH4. (Each month has a trading symbol, like March is H in the Chicago Mercantile Exchange.) The “B” is taken from BTC and the “U” from USD, and “4” signifies the year (2014).
Bitcoin Futures Trading: We’re Ready When You Are
Bitcoin is the beginning of something great:
a currency without a government, something necessary and imperative…
And we need a long time to establish confidence. –Nassim Taleb, Risk Analyst ,University Professor and author of the book “The Black Swan: The impact of the highly Improbable”
Just like you, we’re excited but cautious about investing in Bitcoin futures. Your Cannon Trading broker will discuss the possibilities and the risks with you, always with a goal toward a financial portfolio that meets your needs for now and your future. We continue to offer some of the lowest commission rates in the industry. Call 310.859.9572, 800.454.9572, or contact us to learn more.
Important: Trading commodity futures and options involves a substantial risk of loss. The recommendations contained in this letter are of opinion only and do not guarantee any profits. Past performances are not necessarily indicative of future results.