PIGIN VERSION OF fillippone THREAD
Everything you wanted to know about BTC futures but were afraid to ask!
https://bitcointalk.org/index.php?topic=5188060.msg52572357#msg52572357
With Bakkt Futures launch, I see say plenty people for here dey ask say wetin be the meaning of future, or dey no really understand am or e dey confusing and dey see am as another thing wey e no be.
I go try explain some things for here in a way wey e go easy with real life example and I go dey use BAKKT and CME bitcoin futures when I fit or I go use other examples.
FUTURES DEFINITION
Futures na arranged financial agreement wey dey make the pesin wey dey buy am (or sell am) fit buy (or sell) property (called underlying asset); like raw materials or document wey get value for the particular date or price wey them don already know before e reach.
Example we fit check na:
![](https://ip.bitcointalk.org/?u=https%3A%2F%2Fi.imgur.com%2FUl6MHQ6.jpg&t=665&c=LfCPctSnur6u6g)
If I buy BAKKT future for 7,942.5 means say based on the expiry date wey we agree on wey be Oct. 17th 2019 I suppose buy one single bitcoin from BAKKT warehouse for the price of USD 7, 942.5 . The delivery date go be the next day wey be Oct., 18th 2019. I fit trade this future till Oct 16th 2019.
The same thing if I sell BAKKT future at 7,942.5 means say on the agreed expiring date, on Oct., 17th 2019. I suppose to sell one single bitcoin from BAKKT warehouse for price of USD 7,942.5
For this picture you go see all the important date for a future:
![](https://ip.bitcointalk.org/?u=https%3A%2F%2Fi.imgur.com%2FdcynAQW.jpg&t=665&c=G3rg5jd85V-YXg)
- FTD (First Trade Date): This na the first day to take start to trade the agreed future.
- LTD (Last Trade Date): This na last day wey you get to trade the agreed future contract.
- FND (First Notice Day): This na the first day when exchange go tell holder of long future position about the delivery of underling assets (The underlying assets for here now na bitcoin). Na still the first day when exchange go tell holder of short future say time don reach to deliver underlying to the place wey he suppose deliver am.
- LND (Last Notice Date): Na the last date when exchange and holder go take do all this things wey we just talk for up.
- FDD (First Delivery Date): This na the first day wey exchange fit actually transfer the property of the underlying asset to the long future position make e reach the delivery point (that is Bitcoin for BAKKT warehouse).
first date when the exchange can actually transfer to the the long future position the property of the underlying asset at the delivery point (in this case the Bitcoin at the BAKKT Warehouse). - LDD (Last Delivery Date): Na the last day wey the exchange fit can actually transfer property of the underlying asset to the long future position for the point of delivery (na the bitcoin for BAKKT warehouse). For this one na FDD and LDD go together.
- FSD (Final Settlement Date): This na the final day when the future position holder and exchange go take make payments.
For example, the WTI future at the CME tell us say underlying asset for the following definition wey we see for the
Futures contract explain say the quality and quantity and the point of delivery of the underlying assets, their standard na based on how they trade them on exchange e day very important say the asset wey we trade at the end of the future go get e own quality and quantity. E fit easy for document wey get value make e can hard well for raw material (Physical commodity). For AAPL shares day equal while barrel of oil dey they different due to many qualities.
example: the WTI future for the CME explains say underlying assets together with the explanation wey dey the contract.
contract specification:
200101.A. Deliverable Crudes
1. Deliverable Crude Streams
Blends of West Texas Intermediate (“WTI”) type light sweet crude streams are only deliverable if such blends constitute a pipeline's designated "common stream" shipment which meets the grade and quality specifications for domestic crude. Enterprise Products Partners L.P. (including any successor in such capacity, “Enterprise”) and Enbridge Pipeline (Ozark) LLC’s (including any successor in such capacity, “Enbridge”) Common Domestic Sweet (“DSW”) Streams that meet quality specifications in Sections 101.A.2.- 12. of this rule are deliverable as Domestic Crude.
2. Sulfur: 0.42% or less by weight as determined by ASTM Standard D-4294, or its latest revision;
3. Gravity: Not less than 37 degrees American Petroleum Institute (“API”), nor more than 42 degrees API as determined by ASTM Standard D-287, or its latest revision;
4. Viscosity: Maximum 60 Saybolt Universal Seconds at 100 degrees Fahrenheit as measured by ASTM Standard D-445 and as calculated for Saybolt Seconds by ASTM Standard D-2161;
5. Reid vapor pressure: Less than 9.5 pounds per square inch at 100 degrees Fahrenheit, as determined by ASTM Standard D-5191-96, or its latest revision;
6. Basic Sediment, water and other impurities: Less than 1% as determined by ASTM D-96-88 or D-4007, or their latest revisions;
7. Pour Point: Not to exceed 50 degrees Fahrenheit as determined by ASTM Standard D-97;
8. Micro Method Carbon Residue: 2.40% or less by mass; as determined by ASTM Standard D4530-15, or its latest revision;
© Copyright 2009 New York Mercantile Exchange, Inc. All rights reserved. Page 2 of 6
9. Total Acid Number (TAN): 0.28 mg KOH/g or less as determined by the first inflection point; using ASTM Standard D664-11a (2017), or its latest revision;
10. Nickel: 8 parts per million (ppm) or less by mass; as determined by ASTM Standard D5708-15, Test Method B, or its latest revision;
11. Vanadium: 15 ppm or less by mass; as determined by ASTM Standard D5708-15, Test Method B, or its latest revision;
12. High-Temperature Simulated Distillation (HTSD) as determined by ASTM Standard D7169-16, or its latest revision, as follows:
(a) Light Ends <220°F by HTSD: Not more than 19% by mass;
(b) 50% Point by HTSD: 470°F- 570°F;
(c) Vacuum Residuum >1020°F by HTSD: Not more than 16% by mass.
200102. TRADING SPECIFICATIONS
You see say explaining the quality of barrel of oil hard pass explaining the underlying asset of BAKKT future.:
1 Bitcoin
For here we get difference with CME future, while future contract dey control 1 Bitcoin, 1 future for CME dey control 5 Bitcoin
Contract Unit 5 bitcoin, as defined by the CME CF Bitcoin Reference Rate (BRR)
so while BAKKT future get nominal value of around USD 8,000 CME future get national value of 5* USD, 8000 = 40,000
Also the size of contract wey affect smallest price movement: as the value of contract take low, na so the smallest price movement go take low(tick value):
BAKKT
Minimum Price Fluctuation
$2.50 per bitcoin ($2.50 per contract).
CME:
Minimum Price Fluctuation Outright: 5.00 per bitcoin=$25.00
This means say BAKKT contract fit move from 8,000 to 8,002.5 meaning say who hold one contract go gain 2.5 USD, while CME future fit move from 8,000 to 8,005, meaning say who hold the contract gain 25 USD.
No be by force to deliver the underlying asset.
For stating, differentiation between futures na the one wey day between physically settled and cash settled:
According to
Wikipedia (minor edits for clarity)
- Physical delivery − the amount specified of the underlying asset of the contract is delivered by the seller of the contract to the exchange, and by the exchange to the buyers of the contract. Physical delivery is common with commodities and bonds. In practice, it occurs only on a minority of contracts. [...] The Nymex crude futures contract uses this method of settlement upon expiration.
- Cash settlement − a cash payment is made based on the underlying reference rate [...]. The parties settle by paying/receiving the loss/gain related to the contract in cash when the contract expires.[11] [...]
This na the first innovation of BAKKT future, wey dey physically settled, normally na the buyer of the future dem dey deliver bitcoin to, while CME futures na cash settlement, meaning say at the end of the future, the dollar wey dey equal to the bitcoin naim dem go pay the holder of the future.
For the point of delivery, we go see say WTI hard pass Bitcoin.
WTI:
Delivery shall be made free-on-board ("F.O.B.") at any pipeline or storage facility in Cushing, Oklahoma with pipeline access to Enterprise, Cushing storage or Enbridge, Cushing storage. Delivery shall be made in accordance with all applicable Federal executive orders and all applicable Federal, State and local laws and regulations.
At buyer's option, delivery shall be made by any of the following methods: (1) by interfacility transfer ("pumpover") into a designated pipeline or storage facility with access to seller's incoming pipeline or storage facility; (2) by in-line (or in-system) transfer, or book-out of title to the buyer; or (3) if the seller agrees to such transfer and if the facility used by the seller allows for such transfer, without physical movement of product, by in-tank transfer of title to the buyer.
BAKKT:
Delivery Locations
Bakkt Warehouse
in short, BAKKT dey actually provide Client with warehouse (that is wallet) wey dem fit put there bitcoin to trade against their future.
For real markets, the normal delivery rate of underlying goods wey dey futures contract dey very low only some of the future wey dem trade naim dem dey settle physically or fianciallly. Most futures position don actually close or wey dem commot from before the future expire, perform opposite action, buyers (sellers) of the future buy (sell) the same quality of the same future contract wey go set off their position ward the exchange commot your position without say you carry the delivery of the future.
This carry us go another grammar for future volume again nas straight forward explanation.
Again from
Wikipedia:
Open interest (also known as open contracts or open commitments) refers to the total number of outstanding derivative contracts that have not been settled (offset by delivery).
For each buyer of a futures contract there must be a seller. From the time the buyer or seller opens the contract until the counter-party closes it, that contract is considered "open".
Volume instead is quite a straightforward
definition:
Volume is the number of shares or contracts traded in a security or an entire market during a given period of time. For every buyer, there is a seller, and each transaction contributes to the count of total volume. That is, when buyers and sellers agree to make a transaction at a certain price, it is considered one transaction. If only five transactions occur in a day, the volume for the day is five
Let's see an example:
- A sells a future to B: Total volume is 1, open interest is 1
- C sells a future to B: Total volume is 2, open interest is 2
- D sells a future to A: Total volume is 3, open interest is 2
For the last trade A close him position wey he pass to D: therefore the total position wey open for the market no change to 2
- B sells a future to C: Total volume is 4, open interest is 1
- B sells a future to D: Total volume is 5, open interest is 0
After those 5 trades (volume = 5) dey no get any open interest again, all position for the future dey closed, everybody flat, no final settlement happen for the exchange.
For BAKKT we dey get information about volume only, no be for open interest (update): open interest figure don dey available for Bloomberg terminal.
update).
![](https://ip.bitcointalk.org/?u=https%3A%2F%2Fi.imgur.com%2FUl6MHQ6.jpg&t=665&c=LfCPctSnur6u6g)
On the 25th of September dey trade 131 contracts but we no know anything about how open interest change.
On the CME we get
both informations: ![](https://ip.bitcointalk.org/?u=https%3A%2F%2Fi.imgur.com%2FEjy0DVV.jpg&t=665&c=2tTXivjcjttMOQ)
For CME we get both information on the 256th of September dey trade 5,824 contracts on the September expiry date Na 1172 contracts open tin total; 737 less than yesterday close (Normally dem no dey update OI on real times so both those figures relate to one day before, but you understand). E mean say na 737 contract less than the former close live for the market) wey dey fit deliver when future mature.
FUTURE USES
We fit use Futures hedge or speculate on the price movement of the underlying asset.
Day fit use futures guess or hedge the price movement of the underlying asset for example Bitcoin sensitive business (think of minner) fit use the future take reduce him profit dependency or bitcoin price movement, lock in some kind level of price go therefore, reduce risk and sell better quality of bitcoin futures. In case bitcoin price go up, profit for mining go go up but loss for bitcoin future go affect am, therefore e go wipe the economic impact of that price movement of the underlying assets.
For the opposite case if bitcoin price decrease e go mean say less profits for the mining operations, but the short position for the future go carouse that kind size profit.
For the two case the, the final profit of the miner, the total of mining operations plus the profit/loss from the future position no go dey affected.
This process na hedging dem dey call am, the purpose of hedging no be to gain from favorable price movement for the underlying assets, that is bitcoin, but to prevent loss from favorable price movement and maintain the price result wey dem don already see say dem go get: The miner go hedge himself from bitcoin price movements till e reach the same level of profitability wit bitcoin price case. And yes e profit garus incase bitcoin increase I but protect himself from any case wey concern say price reduce wey for actually end the meaning operation for the first place.
The second main use for future contract na speculation. To speculate means to gain untop the future position from movements for the price of the underlying assets.
If person for market wan speculate on increase for the price of the underlying assets for the future, he fit gain, if the buy future contract come sell am later with high price for the future market or gain from the favorable price difference and the spot market, once the future settle (to take delivery of the underlying asset after the settlement of the future con sell aim for the spot market.
The risk na to face loss in case of huge price movement., like say price fall for this case. If e con end up say the price low pass how e be when dem open the future passion, the holder of long position gats buy the underlying asset for that price in that movement of trade inception can sell the underlying asset at lower price for the sport market, and like that he go loose.
For the opposite, person wey wan profit from lower price, go sell the future, he go gain well well from buying at lower price to settle the future con sell am at the higher price wey dem first talk to the holder of the long position of the future.
FUTURE PRICE SLOPE: CONTANGO AND BACKWARDATION
Make we look the futures wey CME recently quote?
Listed Contracts | Quarterly contracts (Mar, Jun, Sep, Dec) listed for 2 consecutive quarters and the nearest 2 serial months. |
In fact the quoted contracts na the following:
FUTURE | MONTH | LAST TRADE DATE | PRICE | OPEN INTEREST |
BTCV9 | Oct-19 | 25/10/2019 | 8275 | 2142 |
BTCX9 | Nov-19 | 29/11/2019 | 8290 | 248 |
BTCZ9 | Dec-19 | 27/12/2019 | 8360 | 943 |
BTCH0 | Mar-20 | 27/03/2020 | 0 | 0 |
September expiry just expire wen dem write am so the two main cycles expiries na Dec 19 and Mar 20 (dem quote am, dem never trade am) while the serial ones na Oct 19 and Nov 19.
We remember say the bigger open interest dey for the front contract, while the serial contract get little interest and the last serial contract too new to get any opening interest (na only few hours ago dey quote am).
If we check the prices we go say those one dey rise; the calendar spread (the difference between prices for different expiries )na positive. person go think say this na one kind market expectation of easing bitcoin prices between today and December
Well, e dey wrong!
The best expectation for the price wey dey the future na the spot price as e join all the public information we dey make available to price also future prices. If I dey sure say price of bitcoin go rise in one year, or if I just expect an to rise, I fit just buy bitcoin make the price rise, then move the sport price closer to the future price. This na non-arbitrage condition wey link price of the same asset different times.
The future price suppose always dey sometime like that.
center]Future prices = spot price (1+ risk free rate) + cost of carry – convenience yield. [/center]
Make we see wetin e mean
Spot price: as we don see the best estimate for future price na the sport puree, because all the public information about the future don already get discount for market price. (
semi-strong market efficiency à la
Fama).
Funding costs: represented by parte (it risk free rate): to buy bitcoin and trade future require transiency the position low interest rates wordwide wan hold down the importance of this factor, wey suppose be cost and therefore wan increase the future prices.
cost of carry: or cost of holding bitcoin until the future mature, this na wetin mainly dey make the slope of the future price weather upward or downward dey slope. Cost of carry na the cost for storing bitcoin e fit low for bitcoin compared to other future underlying assets (thing of a say you store bitcoin instead of gold, or barrel of oil) but las las we no fit the way insurance e cost and storage for insurance level all together if I get any cost to store my underlying assets, E mean say the future price wey I want sell the asset go high pass the spot, to compensate for that kind cost, therefore push future price up.
The convenience yield na the value of getting the availability of use of the underlying asset until future maturity, E dey particularly relevant for financial assets to represent the coupon or dividend paid from spot date till future maturity. They fit think am like negative cost of storage some kind of income for strorage, or profit wey dey come from holding the assets itself. For Bitcoin case the convenience yield fit come from earned interest wey come from borrowing my bitcoin to exchange or third party (think of blockFI) if I earn interest say I borrow my bitcoin to BlockFI I fit on my own buy them spot con sell them for the future below current market price, if the interest dey more than compensated by interest earned.
The reason why future price show positive (or negative sloping shape gats to do with the cost of carry of the position and the convenience yield: if convenience yield low pass cost of carry, think of any physical commodity, then the future curve go show contango, while if na the convenience yield high pass cost of storage (this na true for many financial asset future ) them the future price go dey characterized by backwardation.
The shape of the curve still fit change over time as e dey contango today, no be so e ben dey for backwardation for the time of url=https://www.newsbtc.com/2019/01/16/etoro-market-update-bitcoin-in-backwardation-this-is-fine/]CME/CBOE future launch[/url]. E good make dem think of wetin dey push the slope of the curve for this kind mixed nature underlying like bitcoin.
COMMITMENTS OF TRADERS:
Every exchange get community of traders report where you fit gut idea on the positioning of players for the exchange.
The commitment of traders report bitcoin futures for CME (the only one wey dey important now) we fit find am for here
link so we fit dey select Equity Indexes, then Cryptocurrencies and finally Bitcoin to make am Underlying:
![](https://ip.bitcointalk.org/?u=https%3A%2F%2Fi.imgur.com%2FRonGWnI.jpg&t=665&c=maCV_LPDeUc-Aw)
E go good make una read
User Guide this guide e explain all the technicalities of how dey make this chart but here I go tell you the main thing:
Yes the total open long position dey equal to short position. If we look aggregate qualities open interest equal to the sun of longs (or shorts) + spread positions.
E dey clearer if we look breakdown by table:
![](https://ip.bitcointalk.org/?u=https%3A%2F%2Fi.imgur.com%2F5DXZF3J.jpg&t=665&c=hewvBMoHYZpQ_w)
And yes different players get different way we dem dey take trade, so to know if they long or short fit help somehow.
The one wey sweet pass na to study the evidence of long/short balance, volume and open interest, e fit give us hint on how the positioning of players dey affect the price action.
USEFUL LINKS:
Another couse wey I for like make you check na this CME own.
INTRODUCTION TO FUTURES: Definition of a Futures ContractThis na actually very complete course on future e go give give better explanation uses, and all the implementation details for CME.
This post na only beginning version wey cover some few topics.
I fit go deeper or cover other topic normal some topics dey wey I fit explain well well.
list]
Term structure (contango/backwardation)- Margins on the open positions (Initial margins/Variation margins/Marking to Market)
-
Commitments of traders example
I dey open to your suggestion to improve the thread, tell me how I go take improve this post.
What prompted my curiosity to translate the named article/post to the
Pigin version was the challenge I took upon myself for Africans to have a taste of the inspiring post in our own comprehensible language. This will ease the grammars that is been used in the original post and aid individuals that might find it difficult to understand mere vocabularies.
NOTE: I decided not to translate the quoted words not to alter the exact meaning.
I spent 62 hours to round up this translation and I will be looking to translate more valuable articles/posts like this one.
Thanks @fillippone for this opportunity to explore your thread once again.