Bitcoin, just a buzzword or the future currency for digital generations? While many have heard of Bitcoin, there are a lot of questions and mystery surrounding this concept. Excitement is mounting among investment communities as the Commodity Futures Trading Commission (CFTC) decides on a regulated Bitcoin futures contract. Here are a few pieces of information every investor should know.
What is Bitcoin?
Bitcoin was the first cryptocurrency, with many more following its lead. Currently there are over 1,100 cryptocurrencies in circulation. However, Bitcoin still dominates the market with its $95 billion dollar market cap, eating up nearly half of the entire cryptocurrency industry.
Bitcoin uses a new, advanced blockchain technology security feature, which many experts regard as impossible to manipulate or defraud. Its ability to withstand security breaches will be paramount to its ongoing success and future applications. While many service providers have been breached, the blockchain technology itself was never compromised.
Arguably the most intriguing and valuable aspect of this future currency is its detachment from a central, governing authority. Its lack of government control frees it from price manipulation and influential supply complications.
What’s the Big Deal?
The mind behind the Bitcoin’s creation intended it to be a peer-to-peer version of electronic cash to be used for online payments without going through a financial institution. The primary benefits of replacing the middle man are increased security through a network of verifiers, and reduced transaction costs.
The network of verifiers refers to the blockchain technology, which has potential to revamp other industries, such as notaries, property ownership and titling, investing and countless others as new applications are continuously being discovered.
Beyond general investment interest, any business that accepts or holds Bitcoin is susceptible to the wild price swings that currently plague the cryptocurrency market. While these fluctuations create an abundance of opportunity, these large movements place a strain on the market and the businesses involved. Allowing companies and investors to hold Bitcoin and hedge with futures will be a determining factor for the longevity of Bitcoin. One solution appears to be legitimizing it as a regulated, exchange-backed futures contract.
Isn’t it Already Tradeable?
While investors are able to buy and sell Bitcoin, there is currently no option for investors to trade a leveraged futures contract in the United States. Additionally, there is no uniformity between the physical exchanges, which leads to large disparities in price and operational support. However, a regulated futures contract is pending approval by the CFTC. If approved, Bitcoin will have a standardized contract size; a unilateral, transparent price and volume; and it will eliminate the fear of falling victim to fraud. A futures contract will allow Bitcoin to be traded the same way investors already trade commodities like crude or gold. Standardization may pave the way for a wider range of consumers and businesses adopting the currency. It should also inherently reduce the unpredictable volatility that the current Bitcoin market is susceptible to.
It is recommended to conduct thorough research prior to investing in cryptocurrencies, as it is a newer technology and prone to fraud through unregulated financial clearing merchants. When trading in any investment market, working with a professional advisor will offer the greatest chances for success, while mitigating risk.
This information is educational only and does not constitute as investment advice.