Back to the Futures
Last night I made a post regarding a potential futures trade with bitcoin as the underlying asset. It had little context but garnered a lot of engagement...in my inbox and unfortunately, not on the actual post. After some reflection, not only does that make sense, but I owe anyone who actually pays attention to the nonsense I post a little context.
Firstly, finance, and even more so bitcoin and cryptocurrencies, can be very intimidating. Commenting on such a post and potentially coming off as silly, even more scary.
I took some time off of dabbling in cryptocurrencies and bitcoin after a great run in 2017 and a short bitcoin corporate gig in 2018. I didn’t want to be typecast as “that handsome bitcoin guy,” but I guess it’s too late for that. I jumped back in this past summer during the DeFi (Decentralized Finance) boom. I got excited again for the first time since 2015 about what this technology can actually do. That’s not what this post is about, though I may write more on that in the future depending how this goes.
I often get caught up in whatever I’m doing and forget that we all live very busy lives and don’t have time to pay attention to all that’s going on. This year has been more wild than most. We’re currently in the longest bull market in history and everyone is required to have an opinion on everything in the news. If you don’t know much about stocks or bitcoin, you couldn’t possibly let anyone know that. I’m here to tell you it’s okay. You probably know a lot more than you think and if you don't, I can keep a secret.
This is the longest introduction to explaining what Futures are ever, but I hope you’re still with me.
I made the post because I’ve been swimming in news, opinions, and data in the market for months and I thought this trade idea would be fun to share. I didn’t expect anyone to actually make the trade. Futures are for experienced traders; you need to live and breathe your market to be able to understand them well. But I should have known posting “$5k risk free” was going to get people excited. I probably did know that.
Futures contracts can be bought or sold. If you’re buying one that means you’re agreeing to purchase the underlying asset (in this case bitcoin) for the contract price (in our case $60,025) on the specified date (June 2021). The other side of the trade is the seller of that contract who’s committing to sell bitcoin for that price on the specified date. The trade is interesting because at the time I posted, bitcoin was trading at ~$55,000.
Someone could sell that contract for 1 bitcoin, then immediately buy a bitcoin on the market at $55,000 and pocket the difference ($5,000). When June 2021 comes around the seller of the contact *must* provide the buyer 1 bitcoin for the price of $60,025 and since she already bought the bitcoin at the time she sold the contract, there’s no risk.
The fluctuation in the price of bitcoin has no effect on the trade because the seller has already fully secured their end of the deal from the get-go.
Okay, so it’s not completely risk-free. From the time the contract is sold until you buy the bitcoin, the price of bitcoin could change. If the contract is massive, say 100 or 1000 bitcoins, slippage on the trade could result in a significant price change negating the profitability of the trade. (Slippage can happen when a large buy or sell order is placed and it eats through the order book changing the price drastically in the process).
Additionally, this trade is mostly for institutions or hedge funds who have lots of money and want a guaranteed return on idle cash. You have to fully collateralize the trade for it to be risk-free (you must buy the entire amount of contract on day 1 and lock it up until June 2021). That’s a ton of capital to lock up for 4 months. There’s also the opportunity cost of doing something else with that money that’s equal to or greater than a 10% return (60,025 – 55,000/55,000). The way the stock market has been, a 10% return in 4 months is apparently unacceptable. LOL.
What this trade does highlight though is that it’s still early days for bitcoin and this new way of facilitating finance. Arbitrage situations like this will eventually be all dried up and that’s a good thing. We want a fair, equitable, and predictable money and financial system. I’m very bullish and excited for the future of finance.
If you enjoyed this or have any questions about bitcoin/cryptocurrencies or finance please let me know and if there’s enough interest I’ll write about it…or quickly DM you an acceptable answer.
