According to the overall progress of this year, bitcoin came to be the fastest growing asset of this year. For now, the question in every mind comes is bitcoin a fad or still the good investment to make?
Here is something every investor should know about Bitcoin Futures.
Bitcoin Future basics
CME Group Inc. CME, +0.96% launched its contract on Dec. 18. The contract allows the trader to place a sustained bet on the value of assets assuring that the underlying asset will move higher or lower. So, it depends on the trader now. The trader who expects the price will go high can play long while the trader who thinks the price will fall can go short. There is a short bet on every long and vice versa. CBOE Global Markets Inc. CBOE, +0.32% launched its bitcoin futures contract, trading with the symbol XBT XBTF8, -4.12%. This contract prompts the two trading halts after the long rise.
The future of market appeals to the shorting of the bet without first borrowing the underlying security. The hope behind this is to make the price more efficient helping to tame the extreme volatility that regularly whipsaws the bitcoin market. This welcomes the bitcoin bears frustrated by the technical difficulty inherent in shorting bitcoin. Shorting creates true price discovery and provides the ability to hedge bitcoins more seriously.
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The contract success can be profitable for those focusing on digital mining appealing the hedging tools. All the big players in the market are particularly interested in the ability to hedge against the sharp rise via future market situations.
The reservations expressed by big banks and brokers on the downside are hard to ignore. The future launch of premature is criticized, and an open letter is sent to the Commodity Futures Trading Commission, the Futures Industry Association said the exchanges didn’t get enough feedback on margin levels and other.
A margin is the amount of money a trader must put to sustain the future positions. Margin amount is 10% of the total value underlying the contract. But CME requires 35% margin while the CBOE is set to require 44% of daily price settlement. In CBOE, if the contract were trading at $15,000, a trader wishing to go long or short would have to put up $6,600. He also must look at the additional margin calls if the margin limits fall.
Future of bitcoin is decided on how far the prices can go before triggering temporary and permanent halts this is common to all contracts terms. Suppose if the CBOE contracts halts for 2 minutes and best bid at that time is 10% above and below the previous day close. The contract moves to the 20% above or below of the previous day close as it resumes.
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Professional traders and institutional investors are likely to tiptoe in the future of the bitcoin market. Can it also be the same with retail investors as they might be tempted to toe in the market of future?
Osborne said “Bitcoin is volatile enough as a stand-alone investment. I don’t think the retail investor needs to be adding to leverage through a futures contract on top of bitcoin,” Osborne said. “So, buyer be very much beware when it comes to retail investors and futures contracts.”