We shall comprehend some of the main issues with Bitcoin futures in this essay.
Settled in Cash
These futures contracts are priced in terms of Bitcoin in Chicago. They must, however, be paid in cash. At first glance, this might not seem like a significant issue. It is significant, though. People rush to purchase the underlying asset when its price rises significantly, creating a shortage. The contracts in this instance won't need to be settled with Bitcoin, though. As a result, neither an upward nor a downward impact on the price of Bitcoin will be possible from the market. The actions of the futures market won't have any impact on the price of Bitcoin. This resembles the contracts that were implemented in Amsterdam during the Tulipmania strangely enough. Additionally, those contracts might only be settled in cash and not. Additionally, those contracts might only be settled in cash rather than the underlying asset, which would be tulip bulbs.
Surrogate Way to Buy Bitcoin
Governments all over the world are tightening the noose on Bitcoin trade as a result of the sharp increase in the price of the cryptocurrency. The scope of taxation is expanding to include exchanges and traders. Many investors are prepared to pay more to evade the government regulation. They purchase Bitcoin contracts rather than genuine Bitcoin because of this. When the current contract ends, they simply open a new one if they want to go long on their investment. They just do not roll over their contracts if they choose to leave their professions!
Dependency on Bitcoin Exchanges
For calculating the price of Bitcoin at any given time, there is no active market. Certain Bitcoin exchanges play a significant role in the contracts that are being sold in Chicago. Based on the price offered by Gemini, a little Bitcoin exchange, the CBOE price is established. The price CME is quoting is also an average of four smaller Bitcoin exchanges. These exchanges are susceptible to financial and cybersecurity risks because of their tiny size. For Bitcoin futures, there is no set price that is used. The price quotes you receive from various exchanges may differ by as much as 25%! This contributes to the market's instability and volatility.
High Margins
Brokers typically require 10 to 15 percent of the asset's price as security. In the case of assets like shares and bonds, this is true. By using this margin money, the brokers are shielded from client-related financial loss. Brokers issue a call for more margin money when the price begins to decline. The contract remains in effect if the investor complies with the call. The contract is sold in the market and the investor's losses are recorded if the investor is unable to provide the required margin money.
Brokers currently require more than 35% of the contract price as margin money due to the suddenness and volatility of Bitcoin rallies. It benefits the market in a way. Brokers can provide their clients less leverage when the margin money is higher. This controls prices by limiting the amount of money investors and speculators may borrow. As margin money, the Chicago Mercantile Exchange is demanding as much as 47% of the contract price! Even though Bitcoin returns could be high, a higher security amount restricts how much money can be generated from the trade.
Risk to Brokerages
The brokerage companies are also under danger. A lot of people have started providing Bitcoin contracts to satisfy customer demand. However, given the tremendous volatility of Bitcoin prices, there is a significant solvency risk. Brokers stand to lose a lot of money if these brokerage firms sell a lot of future contracts and there is a price rally. This is due to the fact that for every investor who is long, there is an investor who is short. Brokers will still be required to reimburse the investor going long if they are unable to recoup the money from the investor going short. This jeopardises the brokers' financial stability and potentially that of the entire exchange. The majority of brokers are starting to establish distinct legal companies for Trading in bitcoin. This is done to make sure that, even if the Bitcoin industry experiences bankruptcy, it won't have an impact on the brokerage's other lines of business.
In conclusion, the entire Bitcoin rise is beginning to resemble the Tulip Mania. The market was dangling by a thread when the tulip futures were introduced. The tulip bubble exploded not long after the futures contracts were established. It appears that the Bitcoin economy will meet a similar demise!
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