Understanding Bitcoin Futures and Value

There are many reasons why investors shy away from Bitcoin and other cryptocurrencies. Volatility, liquidity, lack of intrinsic value and historic data are near the top of the list. But now that there are futures contracts for Bitcoin, it is gaining popularity and credibility.

The search for intrinsic or fair value usually includes violent price swings and tremendous risk for traders. When volatility is high and liquidity low, traders tend to shy away. The exchanges provide a forum for buyers and sellers to trade Bitcoin in the open market. Now through price discovery we can begin to understand what the value of a Bitcoin is.

Futures markets were originally created so farmers could enter contracts to hedge future price swings for their crops. If a farmer feared the crop yield would be lower than expected he might buy futures to hedge against rising prices. On the other hand, if crop yields were likely to be better than expected, a farmer might sell futures to hedge falling prices. The forces of supply and demand cause price discovery. And from that price action fair value areas form and market traits are revealed.

Most commodity markets have a long history and data that allow us to determine benchmarks, such as range size and time at price. Bitcoin futures have been trading for about a month. There have been some dramatic swings and periods of consolidation, just like any other futures market. We are only beginning to understand Bitcoin tendencies.

Traders need to know how far a market is likely to move during a given time frame. Traders use price data to calculate when probability favors a breakout or onset of a trend. These data become more useful as time passes. The charts below include statistics since Bitcoin futures opened for trading in mid-December. There is not much data, but we must start somewhere.

bitcoin futures

The chart below shows weekly profiles with each day color coded. The range (high minus low) is noted below each profile. The horizontal dimension (TAP-Time at Price) is also displayed. The average range can be used to signify when a market has moved too far, too fast (overbought/oversold). The dimension of TAP is used to indicate when a consolidation period has run its course, thus favoring a breakout or sizable vertical move.

The summary to the right shows 15000 as the high volume or fairest price for Bitcoin since futures started to trade.

bitcoin futures

John Seguin
Senior Futures Instructor
Market Taker Mentoring, Inc.


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