Recently CME announced that they will issue Bitcoin futures and commence their
trading by the end of the year. I am going to try explaining as simply as possible why is that an important factor for the development of Bitcoin.
What Are Futures Contracts?
Think of the following example: Let’s say you are a director of a large company that
mass produces wheat flour. To do that, you need large quantities of wheat.
The problem is because flour’s price is always fluctuating, it is hard for your financial managers to accurately predict costs to determine whether the company is going to be profitable. If you are making calculations based on the fact that currently, wheat sells for 100$ per kilo, the result is most likely going to be far from the expectations.
If prices go above 100$, your company is at risk of spending money on buying wheat far more than the projections indicated.
Therefore, you come up with the idea of entering into a contract that will lock in the current price, allowing your company to buy wheat at 100$ per kilo at a determined date in the future regardless of what the market price of wheat will be at the time.
In exchange, you pay the writer of the contract a premium for selling you the contract. The actual underlying functions of this instrument are a lot more complex, but that is what futures contracts are in a nutshell.
How Does That Affect Bitcoin?
Bitcoin’s price is known to be very volatile most of the time. That creates many risks
that most fund managers and investors are not willing to take regardless of what the expected payoff is.
Bitcoin futures will partially assist to hedge against the risk involved in investing in Bitcoin.
Since investors would be able to lock in at a price for just a premium, they
would be more willing to buy Bitcoin knowing they can minimize investment losses.