Like a self-fulling prophecy, the price of Bitcoin Futures listed by the CBOE soared on its debut last night because… Bitcoin Futures are now a reality. Bitcoin futures spiked as much as 26% before coming down to finish up +18% gain on their first day. One of our followers on Twitter summed out the peculiar-ness about it all.
Isn’t it weird that a centralized exchange are transacting futures of a decentralized asset?
— M (@mariokmedina) December 11, 2017
In the first two hours of trading, there were roughly 800 contracts traded per the CBOE.
— Cboe (@CBOE) December 11, 2017
How does this scale compare to other launches? CBOE’s Director of Education Russell Rhoads says Bitcoin Futures had a better first day than the first day of the now insanely successful VIX futures.
On the first day of trading at @Cboe in 1973 911 options traded. First day of $VIX futures in 2004 saw 461 contracts traded. 3 hours into the first #bitcoin futures session and volume is just over 1000 contracts.
— Russell Rhoads (@RussellRhoads) December 11, 2017
The number is now roughly 3,700 contracts, per the Cboe website. With the Bitcoin craze now intersecting with the futures market, there’s apt to be some confusion out there on exactly how futures markets work. Sure enough, enter Bloomberg Gadfly with their explanation of Bitcoin futures first night.
First, they conflate Wall Street with LaSalle street, saying Bitcoin has entered “Wall Street’s established futures market”. Not a huge deal, but hey, we’re proud of our futures markets here in Chicago… let us have some props in relation to Wall Street every now and then. But the more worrying thing is the perception that the futures prices are somehow a ‘guess’ of where prices will be in 4-24 weeks:
“Based on prices for bitcoin futures contracts settling in January, Wall Street’s best guess is that the price of the cryptocurrency will rise another $1,225 in the next six weeks or so.”
First, it’s an open futures market available to anyone with a trading account which has access to CBOE products. So, it’s not Wall Street setting the price of the futures – it’s the global network of futures traders which did that on Sunday night. Second, whoever set those prices, offering to sell at this price when someone else was looking to buy at that price – wasn’t ‘guessing’ on where prices will be weeks from now. They were ‘accepting’ where prices will be (for them) weeks from now. Semantics, to be sure, but meaningful nonetheless.
You see, futures prices aren’t meant to suggest where the market is going in the future. Futures markets don’t predict what prices will be in the future…. they allow traders to lock in a future price today. It’s confusing, but futures are about what you can get today, not in the future. Maybe they should have been called ‘Todays’ instead of ‘Futures’. The whole point of the futures markets is to be a risk transfer mechanism. “I’ll accept this price, today, for something deliverable in the future, given all the known facts.” The futures market is all about the inability to predict or know what prices might be in the future. The supplier of the commodity is trying to get rid of the risk of the unknown, while the speculator is trying to profit off the risk of the unknown. The very inability to predict is what makes futures markets possible.
And the article does highlight this inability to predict… even if it does come from a place of ‘there’s something wrong with these futures if they can’t predict this stuff.”
Futures, despite the whole madness of crowds thing, are rarely predictive of the actual future… But futures markets almost never predict shocks like heavy rains or droughts. Futures on non-physical assets haven’t worked any better. In March, VIX futures predicted that the volatility of the stock market would rise by a third. Instead, share prices continued to head straight up, and the VIX has declined.
Now, the interesting fact they get into is that futures prices settled higher than the current cash price (and we will give Gadlfy props for explaining what backwardation and contango mean), which was somewhat confusing. Many thought the futures would be immediately sold en masse as cash Bitcoin holders looked to hedge their huge gains. But again, for the futures price to have dropped significantly, say to 10,000 per Bitcoin, those selling the Bitcoin futures (ignoring pure speculators for a minute) would have essentially been getting paid today for selling their Bitcoin three weeks from now at 10,000. Why do that when they can sell the cash bitcoin today? And consider the pure speculator for a minute, who doesn’t have a cash Bitcoin position. What would entice them to sell Bitcoin last night given what has happened on Bitcoin’s parabolic move higher? Would you do it for 1% over the price of Bitcoin? 5%? Turns out some of them came out around a premium of 18% – essentially telling the world not that that’s where they think Bitcoin will be 3 weeks from now, but rather that’s the built-in premium they’re going to need in order to step in front of this freight train.