I wrote last week about crypto coins or so-called cryptocurrencies. Read here if you missed it and stated:
“Unfortunately, most people are treating crypto coins as poker chips and the crypto-coin market as a casino. Which it has become to a large degree. It is a bubble which could get a lot bigger before it either pops (devastation) or deflates in relatively non-destructive manner. We would be lucky if the latter occurred and if you were fortunate (or unfortunate) to have lived through the dot-com bubble from 1996 – 2000, will indeed see the similarities.”
Now the chatter and media noise around the mother of all crypto coins, bitcoin has become deafening. Wallstreet has joined the fray with the first bitcoin futures contracts trading this morning in Chicago.
What are futures?
Futures are a way to profit from short-term price movements, both up and down, in an asset without actually owning the underlying asset. A futures contract is a derivative product that gives you the right to buy a certain commodity or financial instrument (like bitcoin) at a later date, for the agreed price now on the condition, you agree to keep that promise and take delivery of the asset in the ‘future.’
A fun way to learn about futures and how you could make a ‘killing’ or ‘lose your shirt,’ consider watching the movie Trading Places. One of my favourite movies, Trading starring Eddie Murphy and Dan Akroyd puts the futures market at the centre of the plot. It tells the story of an upper-class futures commodities broker and a homeless street hustler who unknowingly are made part of an elaborate bet by the owners of a futures trading firm. Essentially they swap their places to see if anyone can be taught to trade. The storyline is a modern take on Mark Twain’s classic 19th-century novel The Prince and the Pauper.
Not to digress. In the case of bitcoin futures, one contract size is equivalent to 5 bitcoins with a notional value of around $80,000 based on today’s bitcoin price. So you would buy a futures contract expiring either on the last day of the month in January, February, or March. The futures have already jumped higher and triggered circuit breakers in overnight trading.
Futures are not the way to purchase bitcoin for individual investors and unless you’re a professional speculator, trader or using it as a hedging mechanism against your millions of dollars in bitcoin, avoid futures like the plague!
If you want to own bitcoin, have a conviction or thesis on why you believe it’s fair value is not being reflected in its current market price. Be an investor. An owner. Purchase the asset with cash (risk capital) and sell when you believe the asset has reached fair value. There are many relatively safe exchanges to buy bitcoin and other currencies as well as Coinbase, perhaps the best retail platform to buy small amounts of crypto coins.
With the market capitalisation of all crypto coins above $400 billion. I’m not expecting the excitement and speculation to abate anytime soon. I’m not buying any bitcoin at these prices. I believe there is relatively better value in other crypto coins that are worthy of consideration as an investment.
This article is for information purposes only and does not constitute investment or financial advice. The views and opinions are my own and not necessarily those of my partners, associates, or affiliates.
Suhail Ahmad has over 20 years of experience in financial services and technology working in Canada, U.K. and the Middle East. He is a trusted adviser on business growth, innovation, and value creation in a digital economy. For more information, email [email protected]