Red sky at night, sailor’s delight. Red sky in the morning, sailors take warning. It is morning at sea for bitcoin futures. Sails are on the horizon. Some have the colors of merchant ships; others are flying the king’s standard.
The Long and Short of Bitcoin Futures
The Chicago Board Options Exchange (CBOE) priced bitcoin (BTC) futures on Sunday, December 10. The Chicago Mercantile Exchange launched bitcoin futures on December 18th. NASDAQ, Cantor, and Nodal also intend to launch bitcoin futures. TD Ameritrade customers will be able to buy bitcoin futures in their accounts. The merchant ships have treasure to store, and the admiralty wishes to collect taxes. The merchants will sail away to return another day, but the king’s men will stay, and taxes will be paid.
Traders have the opportunity to “go long” the bitcoin futures and own the right to profits or the charge of losses above or below the $15,000 CBOE strike price. Those orders will be matched at auction to “shorts” – those who wish to sell futures for an immediate payout in dollars.
LedgerX initiated a long-term equity anticipation security (LEAP) on November 18 with a strike price of $10,000 when bitcoin (BTC) was trading at about $7750. That contract, priced at $2250.25, allowed the holder to buy bitcoin for $10,000 until December 28, 2018. That $2250.25 invested for a few weeks is worth at least $6500 “intrinsic value” (BTC $16,500 12/11/17) plus “time value” on a contract that does not expire for another year.
The CBOE has a 44% margin requirement or $6600 at a strike price of $15,000. Profit or loss on the future is dependent upon price movement of bitcoin above or below that level. But the bitcoin futures trade as securities separate from the bitcoin price. The XBTF8 CBOE bitcoin future, which expires in March, reached a high of $19,330 while bitcoin was trading at less than $17,000. It took BTC ten days to reach $10,000 after LedgerX priced its Long Term Equity Anticipation Securities (LEAPS) at that price.
Will the high in the XBTF8 set Sunday be a self-fulfilling prophecy and propel the price of bitcoin higher? Or will those who have long doubted the legitimacy of bitcoin at last be able to profit from their predictions of doom by selling the futures short? A CBOE member may short up to 5000 contracts. For each $1000 drop in the value of the bitcoin contract, such an investor would experience a $5 million gain in account value.
Separating Bitcoin from the Blockchain
Bitcoin is a blockchain performing the most primitive of mathematical functions in a highly complex way. Bitcoin counts. What once is counted, cannot be uncounted. Bitcoin has counted more than 500,000 blocks without a breaking the chain. The longer the chain, the harder to trace back to the start of its encrypted maze. Its length and strength are trusted more with each additional block. This simplest of arithmetic, repeated every ten minutes for nearly nine years, has been trusted with over $250 billion. The more bitcoin secures, the more it is trusted.
“Trust” is cited four times in the first paragraph of the white paper Satoshi Nakamoto wrote in 2008 to describe “a purely peer-to-peer version of electronic cash….” He states that our current fiat currency system depends upon “trusted third parties to process electronic payments” and proposes a system that eliminates the need for trust by eliminating the possibility of reversing a transaction. Since every cryptographic “block” in the bitcoin “chain” is a lockbox that cannot be unlocked without first unlocking its successor, the more blocks in the chain, the more secure each predecessor becomes.
Each block in a chain can contain and secure any information its creator desires. But bitcoin records only bitcoin transactions. Blockchain, as a continuously growing list of encrypted records, has been applied beyond currency to more the complex requirements financial accounting, industrial logistics, and electronic recordkeeping. Blocks can be “permissioned” so that only certain digitally identified individuals may access the information within.
Banks, regulators, and technology firms have joined Consortium to support its Corda distributed ledger platform on the Amazon Web Services marketplace. IBM Global Financing has moved all the information of 4000 partners and suppliers to the IBM Blockchain. In Sweden, Georgia, and Ukraine, property registers are being stored with blockchain. Several states have changed laws to allow blockchain technology to be used in real estate transactions.
New York Federal Reserve President William Dudley has previously stated:
It’s really very premature to be talking about the Federal Reserve offering digital currencies, but it is something we are thinking about.
Looking Beyond Bitcoin
Bitcoin was blockchain’s Kitty Hawk, and bitcoin.org was its Wright brothers. Passengers signed up, more wings were added, and now the simplest of aircraft flies better than ever. According to Nakamoto’s estimate: “A block header with no transactions would be about 80 bytes.” The average bitcoin block size is now over the one-megabyte capacity originally coded into the algorithm at creation. Bitcoin can process approximately seven transactions per second, while Visa can process 17,000. Passengers on the bitcoin airline were restricted to a one-megabyte carry-on, and the time to add new wings for additional passengers lengthened to a point where some were unable to fly. They looked for alternatives.
Bitcoin Cash (BCH $1400 12/11/17) presents an eight-megabyte transaction capacity that is scalable to 32MB, non-reversible transactions, and each with a unique digital signature. BCH is made for speed. BCH multiplies bitcoin’s transaction speed and significantly reduces the average transaction fee. Though few merchants accept Bitcoin Cash as payment compared to the ever-growing list that accepts bitcoin (Overstock, Virgin, Dell, Intuit), Bitcoin Cash may now have a more important function than as spendable currency.
When bitcoin fell $2000 in market value after the SegWit2X failure, Bitcoin Cash rose by $2000. Those wishing to exit BTC, upon disappointment that they would receive no free coins from the failed fork had few convenient alternatives for an exit. Selling BTC to buy fiat currency (Dollars, Euro, Yen, Yuan) would involve banks, transaction fees, traces of large movements of cash, and most important, at least 48 hours of time. Selling BTC to buy BCH may have made much more sense in terms of cost, anonymity and time.
Again, when the bitcoin bloodletting was over, BTC rose by $2000 and BCH fell by $2000. Both recovered to trade in new higher ranges. While the market price performances of most other crypto-currencies have lagged that of the original digital coin, bitcoin has broken out and now appears to be forming the handle of a “cup-and-handle” chart pattern.
Half of the world’s population does not have access to banks. No banks, no cash, no Visa. Where there are no banks, barter is common as a form of commerce. Indigenous people take what they can gather or produce to markets in villages, towns, and cities to trade for their immediate needs or for their country’s fiat currency. Bitcoin makes barter digital. For those who long to barter their wealth with other like-minded individuals, the dream of a purely anonymous transaction in a market where concerns of trust have been eliminated has been realized.
Have you traded CBOE or CME bitcoin futures? Is Bitcoin Cash a solution until Bitcoin can be scaled properly? Let us know what you think in the comments below.
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