(Click to read or re-read “Part 1” and/or “Part 2.”)

Bitcoin Futures Solve Certain Issues

The incredible growth in Bitcoin’s market capitalization, combined with growing global acceptance of it as a potentially-lucrative store of value, have led to the development of bitcoin futures. With major players like Goldman Sachs exploring a global Bitcoin trading desk (rumor has it that it will be up and running in June 2018) and more traditional, big money players on the hunt for Alpha in the current low-interest rate environment, standardized Bitcoin futures fill a number of immediate and pressing needs:

1) Futures contracts are a potentially “safer” way to speculate on Bitcoin. Unlike the electronic exchanges currently in use, Bitcoin futures are traded on exchanges made up of clearing corporations. Modern clearing corporations guarantee the integrity of each and every transaction, becoming the de-facto buyer to all sellers and seller to all buyers. They eliminate nearly all counterparty risk.

2) Futures contracts are transparent. All futures transactions have real-time tracking and are easily traceable. Money may be lost through trading, but it won’t disappear due to a hack. While this does involve the loss of the anonymity provided by the blockchain, it also means greater transparency.

3) Futures contracts are extremely liquid and trades are instantly verifiable. This makes trading relatively friction-fee compared to electronic exchanges. The growing size of the Bitcoin blockchain means it can take hours and lots of computing power to verify transactions. Bitcoin holders can use the futures market to “exit” the market instantaneously. Bitcoin bulls can use futures to establish long positions instantaneously. There is no lag. More importantly, futures exchanges are well-accustomed to volatility and rarely shut down or stop trading because of it.

4) Futures contracts provide a way to “short” bitcoin. There really hasn’t been a good way to “short” Bitcoin until now, aside from a few, fairly illiquid electronic option exchanges. The anonymous structure of the blockchain makes it impossible to “borrow” bitcoins and sell them to someone else with the intention of buying them back for a lower price later. Since Bitcoin futures are tied to the price of Bitcoin and not to physical Bitcoin itself, it is just as easy to “sell” (or “short”) contracts as it is to buy them.

5) By providing a method to “short” bitcoin, futures contracts can also lead to faster overall acceptance of bitcoin as a legitimate currency. Futures contracts can help make bitcoin more acceptable as payment. Vendors may be quicker to accept bitcoin as payment if they could lock in the value of bitcoin by shorting futures to hedge its value. Larger players may be more willing to part with bitcoin in exchange for goods or services if they knew they could still participate in upside appreciation by buying futures contracts.

Bitcoin Futures in Brief

Futures contracts are essentially “paper transactions” – they do not involve the purchase and sale of the actual investment instruments themselves. They are contracts for delivery at a future date. Because no delivery takes place prior to a specified period, no money actually changes hands. The buyer of a futures contract does not have to pay money and the seller of a contract does not receive any money. Rather, both the buyer and the seller must post margin with their respective brokers.

Margin requirements are set by the individual exchanges and, for the most part, are based upon volatility and not price. Unlike stocks, the treatment of long and short futures contract positions is identical. Unlike a short seller in stocks, the seller of a futures contract does not need to “borrow” his contract from another party—making it just as easy to sell as to buy.

Unlike stock margin, margin to trade a futures contract is not a down payment on a loan. It is a performance bond that guarantees your broker and the clearing corporation that you are good for a fixed amount of losses. The incredible volatility of Bitcoin trading means bitcoin futures have high margins.

Futures margins for being short bitcoin are higher because losses on the long side are capped (bitcoin can’t drop below zero) while losses on the short side are theoretically unlimited. No one knows how high bitcoin can go – especially if it is eventually accepted as a legitimate currency. As we mentioned earlier in this report, some forecasters are predicting the price of bitcoin to rally as high as $1 million each.

Two Bitcoin Futures Contracts

1) Cboe (Chicago Board Options Exchange): Contract size equals 1 bitcoin. Price is based on the Gemini Exchange – currently the largest US-based Electronic Bitcoin exchange. Price is in US dollars.

  • Night Session Trading Hours (Central Time): 5:00 pm (Sunday eve) to 8:30am Monday. Tuesday through Friday 3:00 pm through 8:30 am
  • Day Session Trading Hours (Central Time): 8:30 am to 3:30 pm, Monday through Friday
  • Minimum Price Change (Tick): $10
  • Symbol: XBT
  • Contract Value: 1 times bitcoin price

2) CME (Chicago Mercantile Exchange): Contract size equals 5 bitcoins. Price is based on the Bitcoin Reference Rate (BRR) which consists of pricing data supplied by several different exchanges and platforms including Bitstamp, GDAX, Itbit and Kracken. Price is in US dollars.

  • Trading Hours (Central Time) 5:00 pm (previous day) to 4:00 pm Monday through Friday
  • Minimum Price Change (Tick): $25
  • Symbol: BTC
  • Contact Value: 5 times bitcoin price

Both of these contracts have been trading since November 2017 with the smaller Cboe contract trading a few weeks longer. Because of its small size, the Cboe contract appears to be attracting more individual traders and more volume. This could change if the larger CME contract begins to attract more institutional capital.

Bitcoin Trading Strategies

The investing world hasn’t seen anything quite like Bitcoin. Its amorphous nature makes it hard to price. Bitcoin may ultimately be worth nothing at all, but it is also possible that it may eventually be worth much more. It is perhaps the purest speculative vehicle we’ve ever seen. Its incredible volatility makes it well-suited for short term trading.

If you believe that Bitcoin is just the latest “tulip bulb” or “dot com” bubble waiting to burst, then you definitely want to consider “shorting” it. However, Bitcoin is so volatile right now that the only direct short we see anyone attempting would be limited to the smaller CBOE futures contract. Tight risk management is essential. This would include a series of well managed short-term holding periods rather than a long-term short that could expose one to huge overnight rallies. The eventual addition of Bitcoin put options to the futures contracts will make shorting Bitcoin safer – eliminating the unlimited loss potential in the futures.

A “Safer” Way to Short Bitcoin?

Bitcoin is displaying all the signs of a classic mania, so it is no surprise that 96% of financial advisors expect it to crash and burn. But the fact that nearly everyone believes Bitcoin is doomed means it may not be. A characteristic of all manias is the tendency of prices to explode higher-than-expected, faster-than-expected. The internet tends to exaggerate this tendency. The famous John Maynard Keynes quote, “The market can stay irrational longer than you can stay solvent” certainly applies here.

If, as we suspect, Bitcoin has become the preferred alternative to gold as a store of value (especially in Asia), then perhaps one way to “short” it long term would be to do so indirectly by establishing a long position in gold and/or silver. A collapse of Bitcoin could cause the flood of cash flowing out of the crypto-currency to rush into precious metals. This would make long-dated call options in both gold and silver not only a potentially powerful, indirect “short” for Bitcoin bears, but an effective hedge for Bitcoin bulls as well. The eventual addition of Bitcoin Cboe and/or CME put options to the futures contracts will make shorting bitcoin safer – eliminating the unlimited loss potential in the futures. Unfortunately, they are not available yet.

A Better Way to “Buy” Bitcoin?

Bitcoin’s potentially unlimited upside means it is starting to find a place in the asset mix of diversified portfolios. Bitcoin’s ability to produce mind-boggling gains means it has the potential to add a lot of “Alpha” (performance above and beyond underlying averages) to a portfolio without adding a whole lot of risk.

Assume you purchased 1 bitcoin for $1,000 at the beginning of 2017 and sold it for the $15,767 referenced in the chart at the beginning of this report, pocketing $14,767 in the process. If you bought just one bitcoin for every $100,000 in your portfolio, you would have enhanced its 12-month return by 14.77% for a risk of just 1%. If you bought one for every $500,000 in your portfolio, you would have enhanced your return by nearly 3% for a risk of just 0.2%. That, folks, is some serious (and seriously cheap) Alpha.

The introduction of futures contracts has made it easier for anyone to add bitcoin to their portfolios without digital wallets or encryption keys. Pairing a long position in the smaller Bitcoin futures contract – with a long-dated silver or gold option – could be an effective way of achieving a fair amount of hedged Alpha with a fixed, identifiable risk.

The brokers and traders here at RMB Group will be monitoring opportunities in all of these markets as the year unfolds. We will alert our trading customers if and when we see them.

Getting Started

Please be advised that you need a futures account to trade the recommendations in this report. The RMB Group has been helping their clientele trade futures and options since 1984 and are very familiar with the strategies suggested in this report. Call us toll-free at 800-345-7026 or 312-373-4970 direct to receive a PDF of the entire report or learn more. You can also visit www.rmbgroup.com to read our ongoing blog posts online.

If you are new to futures and options and want to learn more about them, download the RMB Short Course in Futures and Options. This free, easy-to-read guide covers all the basics. Call us toll-free for your free copy or go to our website at www.rmbgroup.com. Click the Education Tools tab at the top of the home page and scroll down to find the report.

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The RMB Group

222 South Riverside Plaza, Suite 1200, Chicago, IL 60606

This material has been prepared by a sales or trading employee or agent of R.J. O’Brien and is, or is in the nature of, a solicitation.  This material is not a research report prepared by R.J. O’Brien’s Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.


The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that R.J. O’Brien believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.

This report was written by Investors Publishing Services, Inc. (IPS). © Copyright 2018 Investors Publishing Services, Inc. All rights reserved. The opinions contained herein do not necessarily reflect the views of any individual or other organization. Material was gathered from sources believed to be reliable; however no guarantee to its accuracy is made. The editors of this report, separate and apart from their work with IPS, are registered commodity account executives with R.J. O’Brien. R.J. O’Brien neither endorses nor assumes any responsibility for the trading advice contained therein. Privacy policy is available on request.