Cryptocurrency Derivatives Series: A Glimpse At Significance of Cash-Settlement Bitcoin Futures

The underlying asset, bitcoin price trend has been struggling of late, but these are exciting times for crypto-derivatives markets.

BTCUSD price (at Coinbase) has plunged below $8k levels (refer above chart), currently trading at $7,536 levels with intensified selling momentum.

Whereas, the crypto-derivatives avenues are evolving as Bitcoin and other digital assets are highly volatile investments. Intercontinental Exchange has recently announced the launch of the Bakkt™ Bitcoin (USD) Cash-Settled monthly futures contracts. Upon the close of consultation and obtaining of relevant approvals for the rule changes, ICE Futures Singapore plans to list the contract on December 9th, 2019.

While the cash-settling contracts would be subject to the CME CF Bitcoin Reference Rate (BRR) for the financial benchmarks. Renowned exchanges, such as GDAX, Bitstamp, Kraken, and itBit are the constituent exchanges to provide the required data for computation of BRR.

The prime significances of cash-settled futures contracts are:

Single largest advantage of cash settlement is that it represents a way of trading Futures & Options based on assets and securities which would practically very difficult with physical settlement.

Cash settlements have enabled the traders to buy and sell contracts on the underlying securities such as, cryptocurrencies, FX, indices and certain commodities etc which are either unpragmatic or most unlikely to physically transfer.

It is a preferred method since it helps in reducing the transaction costs which otherwise would be expenditure in case of physical delivery.

Just for an instance, the futures contract on a basket of stocks such as S&P 500 will always have to be settled in cash due to inconvenience, impracticality and high transaction costs attached with physical delivery of shares of the 500 listed companies getting traded on a daily basis. While the supply will be sufficient in these cases, whereas there would be fixed amount supply in case of bitcoin (21Mln.).

Amid huge turbulence of Bitcoin and other crypto prices, many traders attempt to mitigate their risk exposure simply by buying an asset when the price drops or selling it when the price goes up.

While the downside of this tactic is that oftentimes money is left on the table after you leave the market. If the price continues to rise after you sell, for example, you’re missing out on profits you could’ve earned had you left your position open.  A key benefit of futures trading is that you can hedge existing spot positions without additional crypto - allowing you to be agile and prepared for any market environment.

Cryptocurrency futures allow us to maximize your returns by utilizing the power of leverage to multiply your profits and apply advanced trading strategies. Use futures to speculate on the direction of the market and minimize risk, all while holding less crypto than on a spot exchange.