Wednesday, October 17th, 2018

Should You Buy Bitcoin Futures?

 

Bitcoin was invented to allow people to make purchases without needing cash. In addition bitcoin is supposed to let you transfer money without a middleman. Along the way bitcoin has gone from being worth pennies to thousands of dollars. In fact, bitcoin just broke the $8,000 barrier this week. Now the CME is talking about bitcoin futures. According to CNBC an advantage of will be that bitcoin futures will rein in big price swings. Should you buy bitcoin futures?

The world’s largest futures exchange wants to guard against extreme volatility in its planned bitcoin futures product.

CME will implement special price fluctuation limits at 7 percent and 13 percent above or below the prior settlement price, and prevent trading outside the 20 percent range, according to details the exchange released Tuesday afternoon.

The trading ranges are similar to what is allowed for U.S. stock index futures. But the limits could be more relevant for the notoriously volatile digital currency and could ease investor concerns about investing in the bitcoin product.

Will the new futures product make bitcoin trading safer, more profitable or more dangerous? Should you buy bitcoin futures or continue to think of bitcoins as a 21st century version of the 17th century Dutch tulip bulb mania?

Can Bitcoin Be Hacked?

Bitcoin is a digital product. It has no reality outside of the computer code in which it resides. If you do not convert your bitcoin gains into currency is there a risk that a hacker will break into the system and take your bitcoin holdings? Bloomberg offers a hacker warning for bitcoin.

Saying Bitcoin is un-hackable is of small comfort to those who’ve lost money through cracks in its ecosystem of exchanges, intermediaries and money-raising schemes.

The latest theft in cryptoland is a reminder that the promise of security and liquidity is only that – a promise. This isn’t a systemic shock in the same league as the Mt. Gox bitcoin exchange collapse, but it’s a warning that transparency and trust are rare commodities in this world.

The size and scope of the attack are small by historic standards, hence why Bitcoin’s price bounced back to $8,200 after sinking to about $7,800. About $31 million was stolen from Tether, a Bitcoin peer that issues U.S. dollar-backed tokens for easier trading on crypto exchanges, and sent to what the company calls an unauthorized bitcoin address. That’s more manageable than the collapse of Mt. Gox – hacked for $450 million – or last year’s $65 million theft at another exchange, Bitfinex.

What happens if in the futures market traders start taking a bearish approach to bitcoin? Could that cause a price collapse of a product that has no backing based on earnings or anything physical?

Diversify, Diversify, Diversify

Many of us wish we had bought a bitcoin or ten back when they well available for a dollar or even $100. Now that the price has gone up there is the temptation to jump in under the assumption that what is going up will continue to go up. Folks need to remember that markets often become irrational just before a crash. As such the decision of a couple of big bitcoin holders to offer to sell in the futures market could drive the market down and start a rush to the bottom which in the case of bitcoin is zero. Putting a little money into bitcoin may be a good idea. Putting all of your investment or trading cash into this vehicle is crazy.

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