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Up 20% In a Day: What’s Driving Bitcoiners towards the CBOE Bitcoin Futures (XBT)?

What it means for the king of cryptocurrency, Bitcoin

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Launched on December 10, the CBOE Bitcoin Futures (XBT) are being counted among the most popular derivatives, currently. The rise in investor interest in these CBOE exchange-traded financial instruments is evident in the price rise so far. What started trading at a humble $15,000 on Monday is now trading at $17,940, recording a 19.6% rise in just one day.

Why Bitcoiners are increasingly flocking towards the XBT

Let’s understand what’s driving investors and traders to this one-of-a-kind derivative. The XBT is the first ever cryptocurrency price-based derivative, and an increasing number of traders and investors are now looking at these for:

  • Hedging their Bitcoin exposures
  • Making trade gains

In their simplest form, these cash-settled futures contracts, trading under the symbol XBT, offer a kind of insurance against adverse movements in the price of Bitcoin. So, bitcoiners who were considering an exit from Bitcoin, having been influenced by notices of caution from certain important market participants, now have a way of staying invested in the currency, while hedging their risk.

Why XBT?

The three key reasons that lure investors to these Bitcoin futures are:

  1. Investors that hold Bitcoin but are skeptical about its outlook can short the XBT. By doing so, they would be able to lock in an assured selling price for their Bitcoin holdings, despite a fall in the cryptocurrency’s price.
  2. Investors who seek to buy the Bitcoins at a favorable price at a later date would go long (or buy into) the XBT, to lock in a favorable price for the Bitcoins that they intend to buy in the future.
  3. Traders, who seek to make gains from changes in futures prices over time, buy and sell into these derivatives actively. These market participants buy on a market dip and sell on a market surge, bagging gains from short-term, even intraday, price movements of the instrument on the exchange.

What does it say about Bitcoin?

Futures trading data gives two specific insights into expectations with the underlying asset:

A rising trend in the futures price over term indicates that traders in the derivatives market are actively betting on the price of the underlying currency to rise to that level over the specified time period. The chart below depicts the trading data for the Cboe XBT Futures as on December 12, 2017, 5:30 AM GMT.

Now, while the underlying cryptocurrency, Bitcoin, is currently trading at about $16,900 to $17,000 at the time of writing, its January futures (expiring January 17, 2018) are settling at $18,545 (table above). Similarly, the February futures are settling at $18,560, while the March futures are at $18,680. The settlement price rising over term to maturity is indicative of the bullish expectations tied to the underlying asset’s value – in this case, Bitcoin.

Moreover, it is worthwhile to note here that a majority of XBT futures’ trading volume currently is centered around the XBT/F8 futures which expire on January 17, 2018 (348 contracts settled against 13 for Feb futures and 28 for March futures). Given the volatile nature of the market for cryptocurrencies, traders are currently willing to make only near-term bets on this derivative.

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