What is a Bitcoin and How Does it Work?
A Bitcoin is a decentralized form of digital currency that allows the trader or user to buy, sell, or trade without the use of a bank. A bitcoin comes in what essentially amounts to a computer file that is stored online in a digital wallet. Each transaction involving Bitcoin is recorded in a public list that documents everything concerning bitcoin from mining to trading called the blockchain.
What makes Bitcoin so confusing to many people is the fact that it is not backed or regulated by any form of government, instead the value of the cryptocurrency is baked into the marketplace demand. Bitcoin has gained a ton of popularity since its inception in 2009. A cryptocurrency that began its life selling at $150 per coin now sells for anywhere between $50,000-$60,000 per coin and has attracted the interest of major investors like Elon Musk.
What is Bitcoin Mining?
Bitcoin mining is the process of finding and putting new bitcoins into circulation in the blockchain and cryptocurrency exchange. Bitcoin mining is a costly, tedious, and often unrewarding task, similar to gold mining in the 1840’s. Bitcoin mining involves the ability to solve incredibly difficult mathematic equations with the hopes of the end reward being one bitcoin. In order to mine a bitcoin a miner would need a very complex mining rig that more or less equates to a supercomputer.
What are Bitcoin Futures?
Bitcoin futures are an interesting caveat to the cryptocurrency market. Bitcoin futures allow an investor to gain exposure to Bitcoin without actually having to hold any Bitcoin. Instead, Bitcoin futures allow the investor the ability to predict or speculate on the future price of Bitcoin, just as if it were a regular futures contract.
How Can I Invest in Bitcoin Futures?
You can invest in Bitcoin futures by purchasing a Bitcoin futures contract or the new micro Bitcoin futures contract, both of which are exchanged on the CME. What is nice about Bitcoin futures is they allow you gain exposure to Bitcoin without having to actually hold the cryptocurrency, but instead allows investors to speculate on the future price of Bitcoin.
As mentioned, there are two different types of Bitcoin futures contract currently being offered by the CME. The first is the Bitcoin futures contract which has the value of 5 Bitcoins. This contract is quite large and holds a lot of value and capitol risk because the amount of money involved. For instance, say Bitcoin is currently trading at $55,000 per coin, that means the price and value of a Bitcoin futures contract would be $275,000. While that amount of money is feasible for some people, most of the population cannot afford to risk that much capitol.
Which is why on May 3rd, the CME released the micro Bitcoin futures contract which is 1/10th the size of one bitcoin, thus providing an affordable an accessible way for many people to gain exposure to Bitcoin. For example, if Bitcoin is trading at $55,000 per coin, that means the value of a micro Bitcoin futures contract would only be $5,500 which is a much more manageable number for some people. Of course, with a much smaller risk comes a much smaller reward.
If you are interested in trading Bitcoin futures, but aren’t sure which contract is right for you, our Senior Market Strategists are here to help. They will work along side you to help you determine the best bitcoin futures contract for your investing needs.
What are the Benefits of Bitcoin Futures?
One of the major benefits to trading Bitcoin futures is the fact that Bitcoin futures are an exchange traded and regulated commodity. One of the factors that often deters investors from investing in actual Bitcoin is that there is very little regulation and unpredictable volatility. Bitcoin futures alleviate those concerns and offer traders a stronger sense of security since they are purchasing an exchange traded and regulated contract.
Another benefit to trading Bitcoin futures is that you don’t need to go through 3rd party apps and Bitcoin wallets. When investing in Bitcoin and other cryptocurrency, the trader will most likely have to purchase their currency through a 3rd party wallet or app like Coinbase or Bread, which can cause issues and bring about concerns of security. Bitcoin futures contracts can be purchased via a regular brokerage account just as if they were any other futures commodity, thus making it a lot easier on the investor.
If you are interested in learning how to invest in Bitcoin futures or have questions, please feel free to reach out to one of our Senior Market Strategists.