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Ethereum Futures Contracts on the Way

January 30, 2020
James Hall


Ethereum Futures Contracts on the Way

The chairman of the U.S. Commodities Futures Trading Commission (CFTC), Heath Tarbert, said in a Bloomberg interview that he expects Ethereum (ETH) futures contracts to soon be offered.

“I want the United States of America to lead in this. So, I want to encourage innovation.”

The chairman explained how he sees the CFTC helping to make this a reality for the USA:

“The two biggest types of digital assets, bitcoin and ether, actually fall within our jurisdiction. So we are doing a lot in the digital assets space. We are seeing exchanges starting to list, certainly we’ve seen bitcoin futures both cash settled as well as physically delivered. My guess is we’re going to see ether futures as well. And as things start to migrate into the commodities space see even more.”

These are not the first comments from Tarbert concerning the possibility of ether futures contracts. During FinTech week in Washington, DC in October of 2019, he stated that “I’d say it is likely that you would see a futures contract in the next six months to a year.”

What is a Futures Contract?

Very simply, a futures contract is an agreement to buy or sell a particular commodity at both a predetermined time and price in the future. Contracts can be made to be cash-settled or physically delivered (you receive the actual asset at the end of the contract). Let’s consider an example of this:

The current price of eth is $180 USD and you are fairly certain that the price by the end of the year will be greater than this amount. There are other investors, though, that see the price falling below $180. Therefore, both hedge their bets in a futures contract where the long position (buyer) expects the price of eth to rise and the short position (seller) expects the price to fall. So for this example, these two parties/positions enter a futures contract today, January 30, 2020 for the physical delivery of ether at the current rate of $180 USD on the last day of the year.

Let us now imagine it is December 31, 2020, and the price of Ethereum is now $200 USD. That means the buyer’s position won as they will now receive eth below market since the price was locked in the contract at $180 USD. Those who sold would be hit with a loss as they must sell at the contractual price of $170 versus the current going rate of $200.

On the flip side, if the price of eth dropped to $100, the buyer loses as they must purchase eth above market rates and the seller wins as they can sell it above market rates.

Why Does this matter for Cryptos?

As more traditional and regulated investment opportunities are made available, those willing to invest in a digital asset such as bitcoin only increases. As Investopedia summarizes, “These centralized marketplaces will facilitate trade based on a trader’s outlook for bitcoin prices, gain exposure to bitcoin prices or hedge their existing bitcoin positions. Overall, the launching of bitcoin futures… will facilitate price discovery and price transparency, enable risk-management via a regulated bitcoin product and give a further push to bitcoin as an accepted asset class.”

Essentially, this can lead to less volatility in the market, a hedge against risk, and can lead to bitcoin possibly being a part of your traditional portfolio.

While many of us are still working for the decentralized solutions to these types of markets, there will always be those who want to use a centralized entity to manage their assets and provide some sort of insurance should there be a loss. That’s why cryptocurrencies that are open and permissionless, such as bitcoin, are so appealing – you have the freedom to safeguard your bitcoin using the most extreme measures to the most lax and the system itself (the blockchain) is never compromised.