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Ask HN: How Would a Bitcoin Futures Contract Expiration Affect Current Price?

6 points by justboxing ↗ HN
When the 1st Bitcoin Futures contract expired on 17th Jan, the blogs and media called it a "Win for the Bears" and there was a widespread sell off. https://cointelegraph.com/news/first-bitcoin-futures-contract-expires-at-10900-win-for-bears

The next one, the CME Bitcoin Futures, expires tomorrow.

I'm seeing a lot of trading charts, and all kinds of analysis on tradingview.com, reddit and other places, but am having a hard time understanding anything.

My question is, how does a futures contract expiration affect the current price of the security (bitcoin in this case) on the day of expiration.

When the 1st contract expired, bitcoin was at $10,900 whereas the contract was sold initially in Dec for almost $17,000.

Right now, bitcoin (BTC) has been mostly stagnant for the last 2 days, trading between $10,000 and $11,500. Given that this price range is well below the $17,000 Dec price, what would it mean for Bitcoin / BTC tomorrow? Will it go down, or up, and if so, why? Why would it (once again) be a "win for the bears"? [I do know what a Bear and Bull is].

From what I understand, a Futures contract is bought or sold to hedge against risks for the underlying asset. Ex: Buying corn futures to hedge against corn price fluctuations. In case of bitcoin though, there is no underlying asset, right?

6 comments

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gesman
I think whatever "effect" is - it is already priced in.

However presence of futures for underlying security in general adds to volatility where little news story causes many traders on a wrong side of the trade to forcefully throw in the towel by their brokerages.

blakdawg
> Futures contract is bought or sold to hedge against risks for the underlying asset. Ex: Buying corn futures to hedge against corn price fluctuations. In case of bitcoin though, there is no underlying asset, right?

The underlying asset is 1 or 5 bitcoins, depending on the exchange where the future is traded. (CBOE and CME, respectively.)

A traditional futures contract obligates the parties to carry out the exchange/transfer at the agreed upon price - this is distinct from an option, which gives one party the right to transact at a given price, and the counterparty the obligation to transact at that price, if the first party elects to exercise their option.

There's a lot of detail on the CBOE BTC futures available at http://cfe.cboe.com/cfe-products/xbt-cboe-bitcoin-futures/co...

Since the CBOE BTC futures are apparently settled in cash, that means that holders of the futures won't get an actual BTC, they'll get USD equivalent to the settlement price. So someone who paid $17,000 for a BTC future whose value on the settlement date was $11,000 would receive a deposit of $11,000 USD. And if someone paid $11,000 for a BTC future contract, and BTC was worth $17,000 when the settlement amount was determined, that person would get a deposit in the amount of $17,000.

I don't know how CBOE is handling this internally - but it's possible (likely?) that the people who are actually selling the futures (e.g., agreeing to deliver a USD amount equivalent to the value of 1 BTC on a date in the future) are purchasing BTC on the open market at the time the future is sold; and they're selling the BTC on the open market on the settlement date (perhaps a little before or after) so they will have the cash to meet their obligation to deliver USD equivalent to the settlement price.

So my hunch is that it means that there's a little extra selling happening on settlement days - but it looks like the volume of contracts (1,907 on January 9, per the article) is small enough that it shouldn't be moving the market a lot. That's roughly 21 million USD compared to a daily average trade volume of about 9 billion USD.

justboxing
Wow! Makes a lot more sense now. Thank you for the detailed explanation.
lucozade
> Win for the Bears

They just mean that the people who made money were the people who shorted the future i.e. who were expecting the price to drop over the term of the future. So those with a bearish outlook for Bitcoin made money.

They're not making any particular claim about the effect of the future on the spot price. At least, that's not what they mean by a "Win for the Bears".

In theory, the futures close price shouldn't have any effect on the spot price if the market is reasonably efficient. My understanding from the relevant CBOE announcements is that they didn't see anything fishy.

That's not to say it can't though. Price manipulation around closes does happen in other derivatives markets and the relevant authorities monitor for it. There's more incentive in options markets which doesn't apply here yet.