ILLINOIS NEWS NETWORK
With the Chicago Board Options Exchange offering bitcoin futures since last Sunday and the Chicago Mercantile Exchange set to offer futures this Sunday, one analyst says it’s just the beginning for digital currencies.
Bitcoin is an open-source digital currency that uses digital ledger technology called the blockchain, a single line of code where every transaction is transparent, yet highly encrypted and secure. Bitcoin is decentralized, which means it’s not controlled by a central bank like the U.S. dollar is controlled by the Federal Reserve.
The transactions are facilitated using peer-to-peer technology through the internet, where high-powered computers answer a complex mathematical equation to approve individual transactions.
High powered computers are also used to “mine” bitcoin as part of the process. There will only ever be 21 million bitcoins available. As of Dec. 12, there are about 16.7 million bitcoin in circulation.
Bitcoin has been around since 2009. It was worth a penny per coin in May 2010. By the first quarter of 2011, it had gone up to $1. By mid 2014 it was up to more than $600 per bitcoin. Just this month, bitcoin has gone from $13,000 to a peak of more than $19,000 per unit. As of Thursday afternoon, bitcoin was trading for just under $17,000.
The CBOE were first to offer bitcoin futures last Sunday. Futures are agreements to buy or sell something in the future at a set price, but futures aren’t purchasing actual bitcoins.
CME said in an email that offering bitcoin futures on a regulated exchange provides the market with greater transparency and price discovery.
LDJ Capital CEO David Drake has been watching bitcoin since its inception in 2009 and said the lesson over the past six days is bitcoin is not a gimmick.
“I’m expecting when the CME comes in and starts trading we’ll see more value and more justification that this is a new crypto asset class,” Drake said. “I think now Wall Street can come in and buy the futures. I think more and more hedge funds are going to be entering this space.”
With the exponential growth of bitcoin’s value over the past eight years, there are concerns that it is a scam, a fraud or a bubble. Drake said it’s here to stay.
“I don’t think we’ve even started,” Drake said. “I think this is a nascent beginning of a brand new asset class.”
Drake expects the value of bitcoin and other so-called crypto currencies to increase, thanks to the futures providing legitimacy. He even estimates it will be up to $20,000 per bitcoin by the end of the year.
There are anecdotes of people getting a second mortgage to purchase bitcoin futures. Drake said that’s not smart.
“You shouldn’t allocate more than 5 to 10 percent of your net worth into it, even that is high,” Drake said. “I think you should just get your feet wet and learn about it and feel comfortable with what you’re doing.”
CME said it’s incorporating several risk management tools for its offering set for this Sunday, like putting limits of a certain quantity that can be traded to ensure the market operates efficiently.
To purchase futures, CME said participants “need to work through a futures commission merchant to access the futures market. They also need to post initial margin and meet a number of requirements to participate.”
To purchase bitcoin, investors must set up a digital wallet or go through a broker like Coinbase. For added security, you can store bitcoin in a so-called cold wallet offline on a thumb drive. More information can be found at bitcoin’s official open-source website Bitcoin.org.
Drake recommends doing as much research as possible before investing.