You’re probably wondering why some traders opt for the new micro bitcoin futures while others just purchase bitcoin through an e-payment app. Isn’t it better to purchase the “real thing” versus a derivative of it? You’re probably even thinking that fractional shares of bitcoin give you more flexibility than trading the micro futures.
Well, the answer is yes and no. It depends on what you’re trying to accomplish. Bitcoin futures aren’t for everyone, but neither are fractional bitcoin shares. And there is a big difference, depending on why you’re looking into bitcoin in the first place.
Are You a Trader, Diversified Investor, or an Ideological HODLer?
- The Trader: Are you looking to speculate on bitcoin’s volatility for shorter-term swings? If so, you’re looking to bitcoin as a trader.
- The Investor: If you’re looking to hold some bitcoin to diversify your overall portfolio exposure over the intermediate to long-term, then you’re approaching it like an investment.
- The HODLer: Perhaps you’re looking forward to the utter collapse of the fiat system, or to hedge the central bank’s frequent monetary interventions and the government’s claim against the future income of its citizens as it balloons the national debt. Maybe you feel that bitcoin will eventually see wider adoption as a medium of exchange or store of value. If so, you’re probably an ideologically-driven HODLer.
A Regulated Industry Can Be a Good or Bad Thing
If you’re a short-term trader or longer-term investor, there is a major appeal to trading in a regulated market–one that’s transparent, one that’s market driven, and one wherein all parties–exchanges, clearing firms, brokers, and counterparties–are held accountable for their actions. If you have a trade dispute, you want to have an authority to complain to in order to seek compensation for unfair damages or losses caused by another.
In contrast, HODLers who seek anonymity and are holding bitcoin to exit the standard monetary system, then they would probably avoid regulators and a regulated environment. There are serious risks to this, of course.
Lower Costs for Greater Capital Efficiency
Micro Bitcoin Futures are tenth of the size of your standard bitcoin futures. The minimum price fluctuation is $0.50 per tick. This may be ideal for those who hold and are looking to hedge actual bitcoin, but let’s take a closer look at what this means.
Since all futures are leveraged instruments, you can actually “control” a lot more bitcoin “exposure” with less money. You’re responsible for that money, should your futures contracts sink below your margin, but if you’re looking to trade bitcoin exposure for a short-term swing, it’s hard to beat a futures contract (whether micro or standard).
Market-Driven or Made Up?
Another important thing to consider: futures prices are market-driven–negotiated between the buyer and seller. This is all recorded and subject to regulatory audit (should it come to that).
In contrast, crypto exchanges don’t always provide a transparent market-driven price, as there are multiple bids and asks coming from multiple unregulated exchanges. In short, how do you know if you’re getting a “real” versus a “made-up” price that benefits the exchange or dealer?
Centralization Isn’t Always a Bad Thing
In 2020, a record number of largely unregulated crypto exchanges were hacked, resulting in $292,665,886 worth of cryptos lost and 510,000 user logins stolen.
In contrast, the Chicago Mercantile Exchange Group consists of regulated exchanges. Every exchange is vulnerable to hackers, but the CME Group is a tough one to crack. And because they’re subject to laws established by the federal Commodity Futures Trading Commission, you’re likely to see fair compensation should any action caused by a cybertheft cause you a loss.
Retail Preference for ‘Safety in Numbers’ May Make Bitcoin Futures More Liquid Than Bitcoin Itself
Bitcoin has grown tremendously in popularity over the last few years. It reached $1 trillion in market cap in April.
Now, not all who bought bitcoin are HODLers. Many just want to trade it. Others just want “exposure” to its price fluctuations but not necessarily own it. Think about it: how many people do you know hold gold ETFs versus physical bars of gold in a safety deposit box?
With micro bitcoin futures now trading in an open and regulated market, where do you think the future of bitcoin investment will go? Compare this to physical versus ETFs/gold futures, and you might have the answer.
The Bottom Line
Similar to trading gold, if you’re simply looking for price exposure, then getting it in the most efficient, transparent, and safest way might work in your favor. In this case, bitcoin futures might be more favorable than bitcoin itself. If you’re looking to control more exposure for less, then only futures can give you the kind of leverage that the “spot” market can’t. But if you’re looking to own the real thing, then bitcoin futures is not going to cut it. While the analogy between gold and bitcoin works on some levels, there is a major difference: gold you can see, touch, and physically store. Bitcoin–you just have to trust that it’s there and that it’s safe, because you certainly can’t see it, feel it, or physically store it.
GFF Brokers is a member of NFA and is subject to NFA’s regulatory oversight and examinations. However, you should be aware that NFA does not have regulatory oversight authority over underlying or spot virtual currency products or transactions or virtual currency exchanges, custodians or markets.
Notice from CFTC: Customer Advisory: Understand the Risks of Virtual Currency Trading
Notice from NFA: NFA Investor Advisory—Futures on Virtual Currencies Including Bitcoin
Please be aware that the content of this blog is based upon the opinions and research of GFF Brokers and its staff and should not be treated as trade recommendations. There is a substantial risk of loss in trading futures, options and forex. Past performance is not necessarily indicative of future results.