How will be organized trading in Bitcoin futures on the Chicago Stock Exchange
Image: Ken Lund | CC BY-SA 2.0
In mid-December, the Chicago Mercantile Exchange CME launched a trade in Bitcoin futures. Later, a course on the basics of working with cryptocurrency and futures on it for beginners was published on the website of the exchange. The Cointelegraph edition has published an analysis of how the new financial instrument will work, and we have prepared an adapted version of this material.
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How it works
When trading futures contracts, traders make a profit by moving the price of an asset in one direction or another. At the same time, investors do not actually own the asset. The contract for the purchase or sale of bitcoins (lot size) CME Group consists of five bitcoins.
Imagine that Bitcoin costs $ 10,000 and a trader wants to buy one contract worth $ 50,000. Before that, he will need to make a guarantee deposit to his account - a deposit, which confirms the trader’s conscientious intentions and ensures that he fulfills the conditions of the transaction. The amount of the collateral usually amounts to 5-10% of the total amount of the contract, that is, in this case, the trader will need to have $ 2500-5000 on the account.
When trading on the CME, there is a limit of $ 5 per minimum bitcoin price movement. That is, if the price of Bitcoin increases by $ 4, the income of the trader will not change at all, and if by $ 5, the investor will receive or lose $ 25 (taking into account that the contract consists of 5 Bitcoins).
Thus, if the Bitcoin price falls by $ 100 dollars, the trader will lose $ 500 from his account.
Trading with leverage
In order to be able to work with $ 50,000 futures, the trader made a deposit of $ 5000. The remaining $ 45,000 is borrowed. The ratio between equity and borrowed capital is called leverage. The use of this tool allows you to increase profits in the event of a favorable development of events, but the possible losses here will be higher than if a trader performed operations only with his own money.
If the bitcoin index rises by 5% or 500 index points, the trader will receive $ 2500 profit, that is, half of the amount of the collateral. In case the bitcoin price falls by the same amount, the investor will lose half of the deposit.
The larger contracts a trader owns, the higher the risk. If the price drops significantly, the trader may lose a greater amount than he originally invested. That is, if Bitcoin drops to $ 1,100, $ 5,500 will be written off from the trader’s account and his debt will be $ 500. In order to continue trading, it will need to be returned.
If a trader incurs serious losses, the amount on his account can reach the minimum margin - the amount that an investor must have in order to continue trading. In this case, the broker will require to deposit funds so that the amount on the account matches the initial deposit.
Risk limitation
In order to reduce the risks associated with bitcoin exchange rate volatility, the CME Group has set limits on the fluctuations in bitcoin futures prices. When the contract price decreases or rises by 7% compared to the calculated price of the previous day, a two-minute monitoring period will begin, during which trading will continue at the 7% border. If at the end of this period the situation does not change, trade will stop for 2 minutes. At this time, traders will be able to generate orders for transactions, but they will not be placed in the trading system until trading resumes. Also, this scheme will work on the boundaries of price fluctuations of 13% and 20%.
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Source: https://habr.com/ru/post/346580/
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