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How Do Bitcoin Futures Work?

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Bitcoin trading

In December 2017, bitcoin futures were introduced on two leading derivatives exchanges in the US, the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE).

The approval of bitcoin futures by the US Commodity Futures Trading Commission (CFTC) has given the digital currency bitcoin the final stamp of approval needed for it to be recognized as a legitimate alternative investment for both institutional and private investors.

Furthermore, bitcoin futures have opened bitcoin up to a much wider investor audience since betting on the price of bitcoin is now easier than ever.

What are Bitcoin Futures? 

Futures, also known as futures contracts, are financial derivatives that oblige the holder to buy or sell an underlying asset at a predetermined price at a predefined future date. Futures contracts are always standardized, trade on exchanges, and detail the quantity of the underlying asset. Futures contracts may be settled in cash or by using physical delivery of the asset. Futures also provide investors with the opportunity to trade an underlying asset with leverage. In the case of bitcoin futures, the underlying asset is the digital currency bitcoin.

For example, an investor can bet on the price of bitcoin rallying in the new year by buying a bitcoin futures contract today that expires in March at the price of the current March futures contract. Let’s say this price is $16,000 and the investor buys one futures contract worth one bitcoin. Should the price of bitcoin be worth $20,000 when the futures contract expires in March, the investor makes a profit of $4,000 on his futures contract. Of course, the investor does not need to hold his futures contract until expiry. He or she can sell it at any time during trading hours on the exchange where the futures contract is listed.

The two bitcoin futures contracts found on the CME and the CBOE have slightly different standardizations but trade in the same manner.

  CME CBOE
Ticker BTC XBT
Contract Unit 5 Bitcoin 1 Bitcoin
Settlement Cash Cash
Currency USD USD
Margin Rates 35% 44%
Clearing CME ClearPort Options Clearing Corporation
Contract Expirations Nearest two months in the March quarterly cycle (Mar, Jun, Sep, Dec) and one month not in the March quarterly cycle. The CBOE has listed three near-term months but intends to add more in the future.

You can find further information about the CME bitcoin futures contracts here and about the CBOE bitcoin futures contracts here.

What Does the Introduction of Bitcoin Futures Mean for Investors?

In simple terms, bitcoin futures allow investors to bet on the price of bitcoin without having to actually physically buy and store the digital currency. This greatly reduces one of the key risks of investing in digital currencies, namely, safe storage.

Furthermore, as bitcoin futures are exchange-traded, they could, in theory, become very liquid investment vehicles. This, in turn, could attract more institutional investors to this new digital asset class. So far, liquidity in bitcoin futures has been rather low compared to other commodity futures. However, as they were launched in December, a month in which trading activity is generally lower than in other months, liquidity will likely pick up in the new year.

Additionally, through the use of futures contracts, investors can now bet on the price of bitcoin declining by selling futures. This allows all the bitcoin “bears” to put their money where their mouth is and bet on bitcoin’s price decline.

More importantly, however, investors with exposure to digital currencies can now sell bitcoin futures to hedge themselves against a market crash. This will allow more institutional investors to gain exposure to digital currencies going forward as they can reduce their overall crypto asset market risk by shorting bitcoin futures.

Bitcoin futures are also a regulated financial product, which means that large institutional investors who are bound by right regulations are now able to bet on the price development of bitcoin by buying exchange-traded bitcoin futures. This opens bitcoin up to a much larger investment community than purely high net worth individuals and hedge funds, as has previously been the case.

Should You Buy Bitcoin or Bitcoin Futures?

If you are an active trader who wants to take profits through intra-day or intra-week trading of bitcoin, bitcoin futures might be the right option for you since you will be trading a relatively liquid, transparent, regulated investment vehicle. Also, in this case, the margin trading aspect of bitcoin futures contracts may play in your favor as investors can buy one futures contract but only need to put down 35 percent (CME) and 44 percent (CBOE) as initial margin for the trade. That means to buy exposure to one bitcoin futures contract on the CBOE (worth say $15,000), the investor only needs to pay $6,600 (44 percent) for the contract.

Currently, only a handful of brokers have enabled bitcoin futures trading for private clients. Ally Financial and Interactive Brokers are two of them. However, as the bitcoin futures market grows, more brokers will likely follow suit.

If you are a private investor looking to buy and hold bitcoin as a long-term investment, you are better off buying the digital currency itself and storing it securely in an offline bitcoin wallet rather than purchasing futures. Firstly, futures contracts are short to medium-term investment vehicles and secondly, when buying futures, investors are required to have funds in a margin account in case the value of the futures contracts drops. If the price drops to a certain level, the investor receives a margin call and needs to top up his or her margin account. Given the high volatility of bitcoin, margin calls will likely become a regular feature for bitcoin futures buyers. Hence, for long-term holders who are happy to hold their coins through the volatile periods, simply buying and holding the actual digital currency itself is the smarter option.

For institutional investors, bitcoin futures are the easier option to gain exposure to bitcoin and for many, it is the only option due to the tight regulatory requirement to which they need to adhere.

Perhaps the most impactful aspect of the launch of bitcoin futures contracts on the CME and CBOE is that it has opened bitcoin up to the entire institutional investment community. If institutional investors start to diversify into the digital currency, bitcoin’s price could easily end up a multiple of what it is worth today.

Want to stay abreast of investment opportunities in new finance? Subscribe to the Bitcoin Market Journal newsletter today!

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How Do Bitcoin Futures Work? was originally posted at https://www.bitcoinmarketjournal.com/bitcoin-trading/ by Alex Lielacher

 

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Cryptocurrency Glossary: Dictionary of Cryptocurrency and Bitcoin Terms

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Cryptocurrency Glossary

The cryptosphere is getting more crowded than ever. More and more people are joining the space every day with the hopes of making quick money.

However, in the process, they are bombarded with numerous terminologies and crypto jargons that makes most of them feel out of the sink.

When I started, I felt the same. But trust me when I say that learning these new terms and jargons is worth every bit of the hassle. Needless to say, it might seem overwhelming at first, but you will get used to it with time. If you intend to stay in the game, it is very important that you understand the terms used in the cryptosphere.

Moreover, if you are not a quick learner and don’t like updating yourself, you are destined to get outdated very soon considering this space is growing at an astronomical pace.

Keeping all these factors in mind, I have compiled a list of cryptocurrency terms and Bitcoin terminologies that you need to know and understand for a successful outing in the crypto world.

A Glossary of all the Cryptocurrency Terms you need to know

1. Bitcoin: When the B is capitalized, it represents the overarching concept of Bitcoin: The technology, the community, the protocol, and the software.

2. bitcoin: When the b is not capitalized, it is describing the unit of currency.

3. Altcoins: Alternative cryptocurrencies to Bitcoin. Examples: Ethereum, Litecoin, Dogecoin etc.

4. Bit: A sub-unit of bitcoin. 1 bitcoin (BTC) = 1,000,000 bits. You can always buy and sell less than one bitcoin.

5. Satoshi: A Satoshi is the smallest unit of Bitcoin. It is named after Satoshi Nakamoto, the creator of Bitcoin. Each BTC is divisible until the 1/10^8 part. A unit of Satoshi is equal to 0.00000001 bitcoin.

6. XBT and BTC: Common abbreviations for bitcoin. There is no difference between these two abbreviations.

7. Confirmation: When a Bitcoin transaction takes place, the blockchain confirms the transaction’s validity. The confirmation is done by “miners” every 10 minutes when a block is mined. It is always advised that you wait for at least 6 confirmations to avoid double spending.

8. Mining: The process of computer hardware doing mathematical calculations for the Bitcoin network to confirm transactions and increase security. Users who use their computers and/or rent resources for mining are called miners.

9. Recovery phrase/seed keyword: Random 12, 18, 24 words that are used to derive numerous pairs of private and public keys. Using these seeds, you can restore your wallet in any other supported seed key wallet.

10. Cryptography: A branch of mathematics and computer science that is behind the invention of cryptocurrencies.

11. Private Key: A private key is a secret, alphanumeric password/number used to spend/send your bitcoins to another Bitcoin address.

12. Public Key/Bitcoin address: This is another alphanumeric address/number which is derived from private keys and is used to publicly receive bitcoins.

13. Bitcoin wallet (Hardware, Software, Mobile wallet): A physical or software object where you have a combination of public and private key stored. Here you can find a list of best hardware wallets.

14. Whitepaper: A report which articulates the problem and solution that the blockchain project/cryptocurrency is trying to solve.

15. Transaction ID: Another alphanumeric string through which you can publicly see the transfer details (amount sent, sending/receiving bitcoin address, as well as the date of transfer) on the bitcoin blockchain.

16. Blockchain: A universal public ledger of bitcoin transactions till date.

17. Satoshi Nakamoto: The anonymous creator of Bitcoin.

18. Cold storage: A kind of storage where you keep Bitcoin private keys offline.

19. HD wallet: Wallets which generate the hierarchical tree-like structure of numerous public and private keys starting from the root seed key.

20. Hardware wallet: A hardware device which stores public and private keys of Bitcoin.

23. Transaction fees: Bitcoin transaction incentives that the miners receive for mining block via bitcoins, which is actually a small fee that the bitcoin users pay in order to complete BTC transactions.

24. P2P: It means peer to peer or person to person.

25. Block: A group of bundled-up transactions which miners choose to verify.

26. Proof Of Work: A decentralized consensus mechanism that is done by mining algorithms by spending computational power.

27. Proof Of Stake: A decentralized consensus mechanism in which your existing stake in currency is used to mine or forge blocks to reach the consensus.

28. Pump & Dump: Massive buying and selling of cryptocurrencies when the price is to one’s benefit.

29. Hash: A digital fingerprint of a fixed size produced by a hashing algorithm by processing data of any arbitrary size (numbers, alphabets, media files).

30. ICO: Initial Coin Offering of new crypto coins or tokens offered to the general public in return for their fixed priced investments. It is a new way of decentralized crowdfunding.

31. Hard Fork: A software update or an update on the blockchain protocol that is not backward compatible.

32. Soft Fork: A software update or an update on the blockchain protocol that is backward compatible.

33. Faucet: A service or website that pay you in cryptocurrencies in exchange for playing games or doing certain tasks.

34. Fiat: A regulated and centralized paper currency of any nation.

35. Block Reward: It is a reward in the form of native cryptocurrency given to miners for solving a computationally difficult problem. Bitcoin miners now get 12.5 BTC for solving each problem for adding blocks to the blockchain.

36. ASIC Miner: An application-specific integrated circuit machine designed specifically for mining cryptocurrencies.

37. Block Height: It is the number of blocks mined after the genesis block.

38. Halving: It is the 50% reduction in block reward after a certain number of blocks are mined. In Bitcoin, the halving happens after every 210,000 blocks.

39. Hash Rate: Hash Rate or Hash Power is the measuring unit of the power Bitcoin network is consuming to be continuously functional.

40. Crypto Exchange: A website that helps one buy/sell cryptocurrencies. Here is a list of top exchanges.

41. Limit Order (Limit Buy/Limit Sell):  Buy/Sell orders placed by traders to buy or sell a crypto-currency when the price meets their target amount. 

42. HODL: It is a meme term which is basically means hold or Hold on for dear life. It means to hold onto the cryptocurrency that you have invested and ignore the sentiments.

43. Whale: It refers to an entity or a person who holds an absurd amount of particular cryptocurrency and has the potential to manipulate the market.

44. Bullish: A feeling based on some factors that the price of a crypto will increase.

45. Bearish: A feeling based on some factors that the the price of a crypto will decrease.

46. ATH: An All-time-high price of a cryptocurrency.

47. FOMO: Fear of missing out. A feeling in which you want to get onboard a skyrocketing price rally.

48. FUD: Fear, Uncertainty and Doubt related to the market.

49. FUDster: A person who spreads FUD based on facts or gut feelings.

50. To The Moon: Refers to price moving to astronomical heights.

51. Bag Holder: Someone still holding an altcoin after a pump and dump crash.

Conclusion

With time, and the ever evolving crypto space, I am sure that many new terms will come up. Hence, I will keep updating this list of cryptocurrency terms regularly on CoinSutra.

Know some more common crypto jargons that can be added to this list? Let me know in the comments below!

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Cryptocurrency Glossary: Dictionary of Cryptocurrency and Bitcoin Terms was originally posted at https://coinsutra.com/cryptocurrency-glossary-terminology/ by Sudhir Khatwani

 

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Best Cryptocurrency Tips for Beginners

Should You Borrow Money to Buy Bitcoin?

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Buy bitcoin

Borrowing money to buy bitcoin is a perilous undertaking with tremendous risks. What if you borrow $19,000 to buy one bitcoin, but BTC suddenly drops to $10,000? You still have to pay back the $19,000 with interest and your asset has lost nearly half its value. These kinds of declines, even if they are temporary, can leave you in agony, hoping your asset returns to the price you paid for it.

It is possible to borrow money from your credit card to buy bitcoin, Litecoin, Ethereum, or Bitcoin Cash through CoinBase. If you pay off the credit card every month, you should be okay. Credit cards are a convenient way to lend money. However, do not miss payments because you can suffer from late fees, interest expenses, or possible downgrading of your credit score.

If you are a holder of bitcoin, you can use your bitcoin to borrow money in order to buy more bitcoin. This type of leverage has been common for stocks on Wall Street for a long time, but now these types of arrangements are popping up in the crypto markets. If this type of arrangement interests you, check out our recent article detailing seven borrowing and lending platforms for bitcoin.

Leveraged Returns

Traders and investors use debt to increase their returns. Let’s say you have $100,000. You borrow another $100,000. You might be able to double your returns, and if your return is 10 percent, you could make $20,000. But what if your investment goes south and you lose 10 percent or $20,000? You still have to pay back the loan with interest, which compounds your losses.

Some traders are overly dependent on debt in order to make returns. The borrow-to-buy mentality can lead to a dreadful trap. You may never get out of debt, and you are always making debt payments as a slave to lenders.

You can look for examples on Wall Street on how leverage affects investments like exchange-traded funds (ETFs). Investors like Tristan Yates have studied leveraged 2x Bull ETFs and 2X Bear ETFs and concluded these leveraged ETFs are a constant leverage trap and do not double returns of an underlying index. These funds only double the daily return, and there is a big difference between doubling the daily return and doubling the annual return.

Other Risks

Another reason to avoid debt with cryptocurrency is the massive volatility in the price of coins. For example, if you borrowed $19,000 to buy one bitcoin on Dec. 17, 2017, you would have lost 30 percent of your investment by Dec. 31, 2017, when the price dropped to $13,000. Then you would have had to decide whether to hold onto your bitcoin until it gets back to $19,000 — all the while paying interest on the loan. Suppose your interest rate is 9 percent. That is $1,710 per year in interest expense, and that does not include principal payments.

Buy bitcoin

There are better ways to acquire bitcoin than borrowing!

A Better Way

There is a better, safer way to invest. Develop an aggressive payment plan to get out of debt. This way 100 percent of your discretionary income is yours to spend, save, or invest. What money you once spent on debt payments can now go into investments, potentially increasing your savings rate. One of the surest and fastest ways to gain wealth is by becoming a debt-free investor who saves and invests 15 percent of annual income.
A wise investor will diversify assets; that way, if one asset class falls apart, he is not ruined. Crypto is an important asset class. Yet crypto is highly volatile, with higher risks than owning the S&P 500. Do not compound your risk in crypto by borrowing money to buy it.

Investing in cryptocurrencies is complex and challenging with plenty of opportunities. Stay up-to-date with the latest news in cryptocurrencies by subscribing to the Bitcoin Market Journal newsletter.

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Should You Borrow Money to Buy Bitcoin? was originally posted at https://www.bitcoinmarketjournal.com/buy-bitcoin-instantly/ by Michael Hooper

 

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Best Cryptocurrency Tips for Beginners

Bitcoin Explained: 3 Easy Analogies for Understanding Bitcoin

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Bitcoin explained

I’ve been drinking a lot of coffee lately with a lot of financial advisors and wealth managers who want to know about bitcoin. The first question they ask me is, “Why are your teeth vibrating?” (Answer: I’ve been drinking a lot of coffee lately.)

After that, here are the top three questions they ask me about bitcoin:

  • What is it?
  • Should I buy it?
  • How do I buy it?

For those of us who have been investing in this world for years, it’s easy to forget that even sophisticated financial professionals are still trying to understand how it works, and how the New Finance revolution is going to impact their lives.

To make the world of bitcoin more accessible to traditional investors, here are three analogies that might help.

Bitcoin explained

Bitcoin is Like a Checking Account

When you withdraw money from an ATM, you’ll see a number representing the balance in your checking account. The bank doesn’t show you a picture of all your cash sitting in neat piles, just a number.

You may have the illusion that cash is the only thing that’s “real,” and this number represents your cash available. The numbers, you might think, are a shortcut. But it’s more accurate to say that the numbers are more real than the cash.

It’s true that you could withdraw that money into cash, but you probably won’t. More and more is handled by credit or debit cards, automatic withdrawals, or checks. There’s no cash exchanged, just numbers flying from one account to another.

Cash is just a physical representation of the numbers, and an inconvenient one at that: cash can be lost, stolen, or put in the washing machine. Cash is untraceable, so it can be used for criminal activities. It’s risky to even hold cash in your pocket, especially if you live in New York.

And even cash is an illusion, because if everyone tried to withdraw their cash at the same time (like during a financial crisis), the system would collapse. The banks don’t really hold all that cash; like you, they just hold enough to manage their daily needs.

So you don’t really own cash, you own a number. When you own bitcoin, you don’t own a thing, you just own a number. Like a checking account, you could exchange bitcoin for cash. But unlike your checking account, bitcoin has the potential to greatly increase in value.

Which brings us to our second analogy…

Bitcoin is Like a Stock

Imagine you bought Apple stock in 2013, just before it began its great bull run. Back then it was $75 a share; today it’s trading at $175. That would have represented a 133% profit in five years.

Now imagine you bought bitcoin in 2013, when it was around $100 per bitcoin. Today, that bitcoin is worth around $15,000, for a 14,900% profit in five years. That’s not a typo.

  AAPL Bitcoin
Price in 2013 $75 $100
Price today $175 $15,000
Profit $100 $14,900
% profit 133% 14900%
$1000 would be worth $2,333 $150,000

Like your Apple stock, you could have sold your bitcoin at any time (and many did, much to their later regret). You could have also bought bitcoin at any time using dollar-cost averaging, investing $100 a month regardless of the price.

A share of stock is a small piece of ownership in a company … but is it really? As a shareholder, you can’t walk into Apple headquarters and demand to talk to Tim Cook. You do have certain rights, but the truth is you’re hoping Apple stock will appreciate in value, and be worth more than you paid for it.

In that sense, bitcoin is like stock: most investors are holding onto it, hoping that it will continue to increase in value. Bitcoin can be bought, sold, and traded on online exchanges, just like stock. The more people have confidence in it, the higher the price goes—just like a popular stock.

People get confused because bitcoin is often called a “digital currency.” Bitcoin is a digital currency, and you can use it to pay for (a few) things, but the truth is that most investors are not using bitcoin to pay for their morning latte. Why would you, when that $4.00 worth of bitcoin may eventually buy the entire coffee shop?

I’m spending too much time in coffee shops. Here’s the third analogy…

Bitcoin explained

Bitcoin is Like Email

Back in the day, there was something called “mail,” which was delivered in small parcels called “envelopes,” and paid for with colorful stickers called “stamps.” It was slow and inefficient, and it wasted a lot of trees, but it gave the government something to do.

Eventually, humans evolved from mail into email, but the transition was not without challenges. “I just click a button, and the email is delivered?” “How do I know it sent?” “Who is this strange person reaching out to me?” “Why am I getting all these Viagra ads?”

You can send and receive bitcoin using a simple address. You don’t need to go to the bank and withdraw cash, you don’t need to write a check, you don’t need to do a wire transfer that takes three days and requires your mother’s maiden name (which everybody knows by now).

Just an address. Like email.

Email is second nature to us now, just as bitcoin (and digital currencies) will be second nature to us in the future. As the price stabilizes and the technology improves, we’ll be using bitcoin—or something like it—to pay for everything. It will be like the transition from snail mail to email.

Cash will still exist in some form, just like we still use postal mail when we need to send Christmas cards or thank you notes. But how many of us pine for the days when everything had to be sent in the mail? The whole system now seems clunky and outdated, like VHS tapes.

None of these analogies are perfect, because bitcoin really is something new. Hopefully they help you understand a bit of bitcoin’s promise and potential. But should you buy it, and how do you buy it? That’s where Bitcoin Market Journal can help: subscribe and we’ll show you how.

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Bitcoin Explained: 3 Easy Analogies for Understanding Bitcoin was originally posted at https://www.bitcoinmarketjournal.com/bitcoin-explained/ by Sir John Hargrave

 

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