BitcoinBracket – Chicago Board of Exchange Bitcoin futures have begun to trade. You can find the most recent quotes On the XBT page here.
The number you are probably looking for is the last trade for the front month circled above. You can tell how bullish futures traders are by looking at this and comparing it to the last price for Bitcoin. When the futures are trading for higher than the coins themselves, it means futures traders are betting that the price will go up. Note that these quotes are delayed by 10 minutes.
BitcoinBrackets – Bitcoin futures launched this evening. This is an exciting step forward, and a step closer to legitimacy, for the currency. Futures can be complicated and confusing, most people have never heard of futures let alone traded futures. The following is a primer to begin understanding. Please read more than just this blog post, which is NOT financial advice, or even guaranteed to be correct, before buying or selling Bitcoin futures.
What are futures?
Futures are derivative instruments that allow for financial bets on real-world assets and indexes. Futures have three main components:
1) An underlying index that represents the price of the asset being traded. This could be the value of the S&P 500, or the price of a barrel of oil, or the price of Bitcoin.
2) An expiration date or settlement date known as a the delivery date. This is the date the the future closes and trader’s gains and losses are paid out.
3) A strike price. The price at which the parties entering the futures contract agree to buy and sell or cash settle the underlying asset at the delivery date.
To explain, let’s use a completely non-realistic example. Imagine there is an index that represents the high temperature in as recorded in Central Park, New York City each day.
In August, two traders agreed to bet that the high temperature (the Index) would be 45 degrees (the Strike price) on December 10, 2017 (The Delivery date). They would enter a futures contract to cash settle a contract at 45 degrees. For each degree above that, the short party (the one who sold the contract) would pay the long party (the one who bought the contract) $100. For each degree below 45 degrees, the long party would pay the short party $100.
Today, December 10, 2017, the high temperature recorded in Central Park was 39 degrees. That means the settlement would give the short trader $600 and the long trader would have to pay $600.
For Bitcoin it’s similar. The front month of the futures, the nearest settlement date, has a settlement of January 17, 2018. The underlying index is the Gemini auction price for bitcoin: ticker symbol GXBT. The strike price is where traders are currently agreeing to enter contracts. Here’s a snapshot of the current prices as of this writing (click the image to make it bigger):
As you can see, the most recently quoted price of GBTX is 16250.00. The most recent trading contract of the January futures traded at a price of 17,920. This implies that the traders think Bitcoin will be up about $1,600 between now and settlement on January 17. If you think that Bitcoin will be higher than that, you’d want to go long and buy the contract at this price. If you think it will be lower then you would want to go short the contract.
Let’s imagine that you bought 1 bitcoin futures contract today. If on January 17, 2018 the GBTX is set at $20,000, your account will be credited $2,180. If GBTX is set at $15,000, your account will be debited $2,920.
BitcoinBracket – On December 5th and 6th. Bitcoin broke through the $12K, $13K, and $14K milestones. Yea, let that sink in. Bitcoin is up 25% in 48 hours. Below is a quick case for a current irrational valuation and a framework for estimating a valuation of the nascent currency.
For this analysis start with an assumption that bitcoin is a zero-sum game. Yep, I just lost a couple Bitcoin enthusiasts who believe the world is going to be transformed, but that’s OK. If I haven’t lost you yet, read on. It is a zero-sum game because it is impossible to take more cash out of the market than has been put into the market. The only exception is miners – but even miners invest substantial capital to produce bitcoin in the form of electricity, hardware, software and time.
Assuming it is a zero-sum game means the value of a Bitcoin should be the total amount of money put into the market, divided by the number of bitcoins in existence (about 16.75M at the moment according to coinmarketcap.com‘s Cryptocurrency Market Capitalization).
With this assumption we can say that the value of a bitcoin rises by the amount of new money entering the market divided by the number of bitcoins in existence. If a rich person invests $16.75 million dollars into bitcoin, the value of every bitcoin goes up by $1.
Looking at the market dynamics over the last couple days the volume on Bitfinex and Bitstamp has been roughly 400,000 bitcoins. There are more coins trading at Coinbase, but the volume isn’t disclosed (do you have an accurate volume to share? leave a comment). Let’s assume Coinbase is 50% of the market. Then let’s be generous and say that 1 million coins changed hands in the last 48 hours.
Further. Let’s assume that every one of those coins that was sold was the entrance of new money. Obviously this is impossible because for every buy, there is a sell. Also most of the coins changing hands are likely traders. But let’s be generous.
The average price over the last 48 hours was, again generously, $13,250. That means at most $13B entered the bitcoin market in the last 48 hours. This raises the value of a Bitcoin $13B/16.75M = $776. Yet, in that same time the trading price of a bitcoin increased over $2500.
That sounds like a lot of over-valuation. But markets occasionally get ahead of themselves. The last 48 hours may simply indicate that the value of a bitcoin was artificially low two days ago.
When you do the same analysis over the last 20 week, though, the total volume is closer to 600K btc/week. The average trading price has been around $6500. Again assuming all the money trading was new money, this means $78B has entered the market. That’s about $4600 per coin. Yet in that time, bitcoin value has gone from $2500 to $14,000. An increase of $11,500 – or $7000 more than the value of a bitcoin has gone up. Bitcoin could easily drop $7000 and is at an irrational level.
Again – those numbers are generous. If half of the money is new money then the value of bitcoin has only increased $2300 in the last 20 weeks.
Together, this put bitcoin in nosebleed territory and it is ripe for a pullback.