Explainer: The future of Crypto is Futures

Good morning! Welcome to The Daily Moon. It’s a brand new week and we want to start you off with a market trend about crypto futures going mainstream. Also, there's crypto chatter from this year’s WEF. Let’s get started.

Can Futures Change Crypto’s Future?

Bitcoin is shaky, Ethereum is on a decline, and Terra had a big crash. But who knows what the future holds, right? That’s what crypto companies are now betting on. The future, through futures.

So far, these derivatives were exclusive territories for listed companies alone. Not anymore. The crypto futures market is booming. And crypto exchanges are competing head-on with Wall Street.

What’s the deal with futures?You may have heard of futures in equities. It’s something similar in the crypto world too. Basically:

• You enter a futures contract and either:

1. Long: Buy asset at X price on Y date.

2. Short: Sell asset at X price on Y date.

• These are price bets between two parties.

• Futures contracts track the price of assets such as Bitcoin or Ethereum.

• There’s no need to actually hold any crypto asset.

• You can hedge against fluctuations in prices.

• You submit a fee/margin, which is a percentage of the crypto’s price.

• When the contract expires, you need to settle in cash.

• On high volatility, you can also exit the contract before the expiry date.

Let’s look at an example of how it will work:

1. Kabir and Alisha enter ‌a futures contract when Bitcoin is at $30,000.

2. Both set aside funds for the contract.

3. Kabir bets ‌Bitcoin will rise to $35,000 in six months.

4. Alisha bets ‌it will drop to $25,000 in six months.

5. Bitcoin rises to $35,000 in six months.

6. Kabir makes a $5,000 profit.

7. Alisha is hit with a $5,000 loss.

The more contracts you buy, higher will be the profits (and losses). If you don’t have enough money, crypto exchanges also allow you to leverage or borrow money.

But this has inherent risks too:

1. Huge debt piles up if you don’t have funds to repay.

2. Leverage to trade in futures may lead to high losses.

3. Crypto price movement is highly unpredictable.

Some crypto players offer 10X leverage, meaning you can bet on a $1,000 crypto asset with just $100 of funds. If your speculation is correct, you get 10 times the amount. But if it turns incorrect, there are heavy losses.

Then why is it getting popular?Directly buying crypto is expensive. Trading in crypto futures isn’t. For banks and traditional exchanges, this is a win-win because:

1. There is no physical delivery of assets.

2. Compliance is minimal since cash isn’t involved.

In 2017, only CME and CBOE (later halted) offered crypto futures. Now there are multiple exchanges offering these products.

Singapore’s SIX Exchange firmed up its crypto plans in 2020 and, a year later, Eurex too announced its entry. And now the Brazil Stock Exchange is also launching bitcoin futures trading.

Meanwhile, crypto firms such as Coinbase, Kraken, Gemini, and FTX want to popularise futures for individual traders. Coinbase even acquired an exchange to offer futures trading.

A new model?FTX CEO Sam Bankman-Fried wants to shake things up. He has proposed that:

• Futures trading should be conducted on a 24/7, 365 days basis.

• There should be no middlemen in trades.

• FTX will directly take on the risks of the contract.

Bankman-Fried has written to the regulatory body CFTC to directly offer futures trades. Many, including CME Group, are opposing it because:-

1. Naïve investors would lose money through auto liquidation.

2. Wall Street exchanges would lose business.

Financial regulators such as the ECB aren’t too happy with the way crypto futures are running and are calling it risky. RBI has also reiterated that, unlike shares that have a company backing them, crypto has no underlying asset.

But price fluctuations and talks of a crypto winter have spooked the market. Derivatives have been discovered as a new option. For now, futures investors are betting long.

WEF’s Crypto Spotlight

Crypto was at the big table at this year’s World Economic Forum. Ethereum co-founder Gavin Wood, Ripple CEO Brad Garlinghouse, and FTX CEO Sam Bankman-Fried were among the many that took the stage. And there was space for views and counterviews.

Hear us outThe ECB called crypto worthless. The industry disagreed. Here are the key takeaways from the WEF:

• Ripple is considering an IPO once the US SEC case is over.

• CoinSwitch wants clarity from the Indian government on crypto.

• Web3 and how it is beyond crypto and DeFi.

• Billionaire Ray Dalio is not anti-crypto anymore.

• FTX wants to be a one-stop shop for all investments.

On the other side, central bankers stuck to their statement that crypto isn’t real. Not everyone has fully accepted crypto yet, but it can’t be ignored either.

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