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Replies to some questions regarding OKCoin´s Bitcoin f
- Why Bitcoin Futures?
- We want to promote Bitcoin payment serviceand help create a healthy industry.
Bitcoin is a revolutionarytechnology that provides anti-inflationary solution with extremely lowtransaction cost. It is also an ideal tool by design for cross-border transactions.Compared with traditional fiat banking services, Bitcoin payment has unique advantages,which to a great degree underpins its value. Given the trillion-dollar size ofthe cross-border payment market today, the future of the Bitcoin looks verypromising. After experiencing explosive growthin 2013, the momentum slows down this year. Due to slower-than-expected growthin adoption, some Bitcoin investors have divested their holdings, leading to downwardmarket momentum. Price volatility being an important factor for most merchants, this has prevented Bitcoin from becoming a more successful payment tool. This is compounded by the fact that the volumes in most exchanges todayare relatively small, which put further restraints on the potential of Bitcoin asa cross-border payment solution. OKCoin’s Bitcoin futures isintended to mitigate the problems. Bitcoin futures’ main utilityis risk hedging, which is extremely important for bitcoin holders to reduce price-relatedrisks. This can be vital for the success of Bitcoin (or not) as a payment toolin years to come. In addition, as we mentionedpreviously, small volume in the spot market is a limiting factor. The highleverage rate in the futures market can make up for the deficiency by bringing in extraliquidity; higher liquidity means Bitcoin-based cross-border money transmitterscan better handle large money transfers. We see Bitcoin futures not only aspeculation tool, but also a necessary step towards Bitcoin being accepted asa payment tool.
- What will be the impact ofBitcoin futures on Bitcoin prices?
- It will stablizes the prices.
Futures as a concept isnothing new. In 1848, the first modern futures market was established inChicago. For over a century, futures has developed into a mature financial instrument.The consensus among the academics is that the futures market stabilizes pricesand increases liquidity in the spot market. As Bitcoin payment servicebecomes more popular, more users as opposed to speculators will join in. These users,most of them being merchants and payment service operators, tend to be morerisk-averse than speculators. To minimize exposure to price swings, users tendto hold the coins for a very short period of time –once the transaction iscompleted, they would immediately be sold off on the exchanges. When the sellingbecame overwhelming, the prices would go down. The futures offers an option to hedgesuch risks, making merchants and payment service operators to feel comfortableholding their coins for longer thus reducing the selling pressure in the spotmarket. Right now, speculators constitutethe majority of market participants. Like every highly speculative market, theprice level has a tendency to drop after a protracted period of stability. Sincemost speculators are in the market for short-term profit; once the market movementis perceived as not strong enough, some would divest and walk away – one of themcan be the last straw. The futures market with highleverage rate will attract the max-risk, max-gain speculators, while themedium-risk, medium-gain speculators will stick with spot market. The effect isreduced dumping pressure in the spot market under unfavorable market condition.As more speculators will hold bitcoins, the number of bitcoin owners willincrease, which is a good thing for Bitcoin’s overall robustness. In addition, due to the highleverage rate, volatility of futures market tends to be greater than that in thespot market. This will attract arbitragers and professional traders alike. Thesemarket participants tend to be intuitional, high-frequency traders and theirparticipation will increase market liquidity. This had been validated by whathappened in the Chinese commodity market futures and financial futures market.In 2010 when stock index futures trading was introduced in China, a largeamount of index funds emerged in the wake, which gave a strong boost to the stockmarket liquidity. 3. - What is unique aboutOKCoin’s futures? - Settlement denominated inBitcoin; profit denominated in fiat currency, stable leverage rates,anti-manipulation measures, multiple trading tools.
1. Bitcoin-denominatedsettlement Settlement is denominated in Bitcoin. No fiatcurrency is needed for traders to trade, which effectively eliminatesgeographic barriers. Investors, regardless of their nationalities, canparticipate as long as they have bitcoins.
2. Unique contract design andstable leverage rate Traditional futures contract representsa fixed number of bitcoins. The biggest problem with such design is that the leveragerate tends to fluctuate as bitcoin price is less stable when compared with fiatcurrency, therefore it is harder for investors to manage their positions. To address the problem,OKCoin designed its contract to have a par value of 100 USD each. Compared withother futures products in the market, OKCoin’s futures have more stable leveragerates, which is conducive to hedging and arbitrage. The profit is easy tocalculate: For every 100 USD invested in OKCoin futures, the profit theinvestors will realize is 100USD * the percentage of price fluctuation duringthe period of contract maturity * leverage rate. If the current bitcoin price is500 USD/btc, then a investor who has one bicoin can use the bitcoin ascollateral to borrow a capital 10 times of his own fund, which can besubsequently used to buy 50 BTC futures contracts. If bitcoin prices rise to750 USD at the expiration date, this investor will realize a profit of 3.3333btc. If the investor decides to sell the extra bitcoins, he will receive aprofit of 2500 USD. By the same token, if the price of bitcoin rises to 1000USD/btc, the profit will rise to 5btc, equaling 5000 USD, 10 times of theinitial investment – no matter how the prices changes, the leverage rate staysstable, which is easier for hedgers and investors to manage their positions.
3. Rigorous anti-manipulationsystem OKCoin futures trading has implementeda series of measures to prevent manipulations. The bitcoin price that OKCoinuses for settlement is the arithmetic mean of the prices of ten major exchangesand each price is the arithmetic mean of prices in the last hour prior to thesettlement. This method reduces the risk of futures market manipulation throughmanipulating the spot market and prevented traders from engaging in self-trading. The ask prices will belimited to a floating range, which is calculated by taking consideration of thespot market prices and futures market prices. While normal trading activitieswill not be affected, it will effectively eliminate the risk of malevolent tradersfrom disturbing the market. Improved margin call system. Ina period of extreme volatility, OKCoin can make timely intervention to prevent forced liquidation of investors’ positions due to an accident order; this will further reduce the risks of a small number rogue traders’ dumping triggering a domino effect inthe market.
4. New trading tools indevelopment A number of new trading toolsare in the works, and will be introduced in the near future. Investors willhave the freedom to set a wide range of parameters regarding how they wouldlike their trades to be conducted.