- Ethereum futures contracts are expected to launch in the near future via Cboe Global Markets.
- ‘Futures’ provide an easy way for investors to ‘bet’ on the price of Ethereum.
- Bitcoin futures (launched in 2017) sent the market to an all-time high, before triggering a 60% reversal.
In December 2017, the price of bitcoin hit a record $20,000. One trigger for this price rise was the launch of a bitcoin ‘futures’ market, introduced by Cboe Global Markets. Cboe is now expected to announce an ethereum futures equivalent.
But what exactly is a futures contract? How will it affect Ethereum and the wider crypto market?
Ethereum futures contract: what is it?
A futures contract allows investors to ‘bet’ on the future price of something.
It’s an easy way to speculate on price rises (and falls) without having to buy the asset itself, in this case, ethereum.
It works like this: you agree to purchase ethereum for a pre-determined price, on a specific date in the future. That price may be higher or lower than today’s value, depending on whether you think ethereum will move up or down.
A real-life example
Let’s say you think ethereum will go up in value. You agree to buy at $290 (today’s price), but you won’t pay until the contract expires in two month’s time.
If ethereum has increased in value when the futures contract expires, you have successfully bought in at a much lower market price.
Most speculative investors close the trade before the contract expires to lock in the profit (or cut their losses) without having to buy the asset itself.
Betting against crypto
Futures trading also allows you to bet against the market.
This is what we saw in January 2018, when the bitcoin price came tumbling down, shortly after hitting a record high. Investors now had a way to ‘short’ the bitcoin market, and they pounced.
What will happen to ethereum?
We may see a similar pattern if the ethereum futures market is launched. Investors will have the opportunity to flood into the market with relative ease. However, they may also bet against ethereum, sending the price down.
Good news for bitcoin?
Tom Lee, who recently reaffirmed his bitcoin price target of $20,000+, thinks the move could be good for bitcoin:
“Since December of this year, if one was bearish on any aspect of crypto but did not want to own the underlying, they could short bitcoin. They can now short ether, means the net short on bitcoin in futures would fall.”
In other words, if investors want to bet against the crypto market right now, shorting bitcoin is their only option. If ethereum futures are launched, however, they will also be able to short ethereum, which could take some of the pressure off bitcoin.
More details about the ethereum futures market
Cboe Global Markets, which owns the Chicago Board Options Exchange, was the first exchange to offer bitcoin futures. It harnesses the Winklevoss Twins’ Gemini market to track the underlying price of bitcoin.
The ethereum futures contracts are expected to use the same underlying Gemini market. They will be ‘cash-settled,’ which means they won’t trade ethereum itself. Rather, they will simply track the price and all positions will be closed before the futures contract expires.
We’re still waiting for a green light from the Securities and Exchange Commission (SEC). However, there is a precedent since the bitcoin futures market already exists.
Although the SEC is dragging its heels on an exchange-traded fund (ETF), it is much more likely to pass the ethereum futures market proposal.