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The Blockchain Brief

Bitcoin Futures & Tim Draper

An attempt at simplifying blockchain concepts, companies, and coins.

Today is the day! CBOE Global Markets (largest US options exchange) will begin rolling out Bitcoin futures tonight at 6pm EST and CME Group (largest derivatives exchange in the world) will launch Bitcoin futures trading December 18th.
 
Up until now, there hasn’t been a medium that has allowed institution & retail investors to get a piece of the Bitcoin price action. The reason why is because many funds have internal rules that prevent trading of unregulated assets on unregulated exchanges. On top of that, many don’t want to deal with the complexities of setting up crypto wallets. Bitcoin futures contracts will finally allow for all of this pent up money on the sidelines to get exposure to Bitcoin without actually having to touch the underlying currency. 
 
Quick primer on Bitcoin futures: 

  1. Bitcoin futures allow for traders to take short (betting it goes down) or long (betting it goes up) positions on the price of Bitcoin without having to buy or sell any Bitcoin. 

  2. The more volatile a futures contract, the more the traders are required to put down as a down payment. Bitcoin futures down payments are dramatically steeper compared to other assets. CBOE will require 44% for Bitcoin futures, compare that to 4% for gold, 4% for corn, 4% for crude oil and 8% for natural gas.

  3. If Bitcoin futures are trading at $10K, you would have to put down $4.4K to buy one contract.

  4. If you bet that the price of Bitcoin goes up and it hits $11K, you would have $1K  added to your account which would represent a 23% gain compared to a 10% gain if you just held BTC. 

  5. If you bet that the price of Bitcoin goes up and it drops to $9K, you would have $1K pulled from your account. That would represent at 23% loss compared to a 10% loss if you just held BTC. You would see the inverse of this if you were to take a short position against BTC. 

  6. Bitcoin futures will be settled in cash and not actual Bitcoin.  

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Although we have seen general positive enthusiasm for Bitcoin futures. It’s a total crap shoot in terms of how the market is going to react. On one side you have people arguing that futures are a big first step towards creating a regulated Bitcoin market which in theory should drive fresh new capital into the space. On the other side, you are opening the market up to large institutions being able to take short positions against the asset which up until now hasn’t been possible. Ultimately, you are adding more fuel to the fire for an already extremely volatile asset. 
 
This past weekend, I did have the chance to catch up with Tim Draper regarding Bitcoin futures. For those of you who don’t know, Tim Draper is the founding Partner of Draper Associates and DFJ. When the US government seized 144,000 Bitcoins from the Silk Road, Tim purchased 30,000 of those Bitcoins at a whopping $334 each. That $10M investment is now worth $450M today. Silly US government. Selling 144,000 bitcoin for $48M when it's worth $2.1B today. 

  Yes, I did creepily take a photo of him. Because I knew it would be good for a future newsletter.

Yes, I did creepily take a photo of him. Because I knew it would be good for a future newsletter.

I happened to be having dinner next to him at the Knickerbocker in NYC, when I recognized his Bitcoin tie. During dinner, I decided to send him a note and a round of drinks for him and his wife (praying that they didn’t buy some super expensive shit. To my delight, Tim doesn’t drink and his wife was sipping on a $11 glass of red. Gotta love a modest billionaire.) Here is a copy of the note.

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At the end of dinner, I walked over to him and was beyond excited to get his viewpoint on Bitcoin futures and to learn something new from one of the masters. I readied myself for some crazy insider information. Ready to pounce on the same trades he was planning. And his shortened response… drum roll please….

“It could go up. Or it could go down. Or it could stay pretty flat within a range. Probably within a range.”

 Thanks Tim! I could have gotten there on my own! Although he didn’t give me anything groundbreaking, it was nice to know that at least I was able to educate him on something. Turns out, he has no idea what a “G” is...
 
Now, no one really knows what is going to happen when these futures launch. In the short term, we will inevitably see some volatility (something that is not new to crypto traders anyways) but long term it should bring more stability and legitimacy to the crypto space, which I believe is the most important part about all of this. End of the day, if you are a true believer in the new future Bitcoin & Blockchain is ushering in, these swings shouldn’t bother you.

So How Am I Trading BTC With Futures In Play?

I may or may not have long futures contracts levered up 50x on Bitmex. And if BTC dips to $2K (which part of me wishes it does), I’ll be mortgaging the house, pulling all lines of credit, liquidating my ROTH IRA account and selling everything I own to buy up as much as I can (not financial advice).

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Julian Jung