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I have been reading news on crypto-currencies. As a developer, I understand well how Bitcoin works. I also have a basic understanding of finance in general and stocks in particular.

I understand how futures contracts work. I read some resources about it. One buyer and one seller agree to make a trade on a specified date a pre-defined amount of goods for a certain amount of money.

I read that BTC futures contracts (backing 5 BTC) are cash-settled, i.e., there is no BTC behind each contract. Hence, 1 contract doesn't imply keeping 5 BTC. Okay, so there is only a bet between two people, and at the end of the contract (June 17), the winner gains the delta price from the loser of the contract.

Here come my troubles. I checked the data from the the Chicago Board Options Exchange (CBOE) and I don't see expected price between "betters" for the end of the contracts. I only see a normal current price of futures contracts.

  • How do I know on what price each futures contract is configured? (The X in "Trader A: I bet that BTC will be worth X on 17 January, do you take the bet?)

  • Why exchanging futures? Why selling a futures contract? And why buying a futures contract?

  • Why is the current futures price not the mirrored price of a BTC?

  • I see there are 3300+ futures created. How are they created? When there is a match between a trader who wants to bet that BTC will be worth less than $Y and another who wants to bet that BTC will be worth more than $X?

  • When I buy a $17,800 futures contract, who gets the money? Because I guess I'm not betting against CBOE?

And so on. I have also other questions but from those you must know what I missed in understanding futures contracts. Thank you a lot.

EDIT:

Thank you all, it is clearer now, but:

I understand that a contract is created when guy A bet that BTC will be worth less than $X and guy B bet it will be worth more than $X. Clear. Each predefined time period, when the price fluctuate, a margin call is made and, let's say BTC price is $X-10, B gives $10 to A.

Hmmm, at this point, B decide to sell the future to guy C at $X. So now, when a margin call is made, if BTC price is $X - 20 then, C gives $20 to B. But ... what exactly happens to A ? The thing I don't understand is that a future is made between two guys, but selling / buy involves the fact that one guy is owning the contract. But no ones really owns the contract, it is a agreement between two parties, so how could one sell it .. ?

  • Re. edit: I think that B would sell the contract (that they had with A) to C at $Z (C paying $Z to B in exchange for the contract). C now has a contract (="bet") with A. Then, if the end price were $X-20, C gives $20 to A. $Z would be determined by how much both B and C differ in their opinion of the final value being over/under the future price $X. – TripeHound Dec 18 '17 at 11:07
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Your questions are all basic futures questions, and not unique to bitcoin, so here's the explanations

And I don't see expected price between "betters" for the end of the contracts. I only see a normal current price of futures contracts ...How do I know on what price are each futures configured ? ( The X in "Trader A: I bet that BTC will worth X on 17 January, do you take the bet ? )

The "current price" is the price that you can enter into a futures contract for,

So why selling a future ? And why buying a future ?

You buy a future when you expect the price to be above the futures price at expiration, and vice-versa for selling.

When I buy a $17,800 contract futures, who gets the money ?

No one - no money is exchanged when a futures contract is traded (other than whatever margin requirements the exchange has). You enter in to a contract to exchange money at a later date. If the price is above X at expiration, the "buyer" gets paid from the "seller" (and vice-versa). The exchange facilitates the payment so the parties do not interact directly.

Why the current futures price is not the mirrored price of a BTC ?

because the bitcoin market is incredibly volatile, and different liquidity between the bitcoin and bitcoin futures markets. There should be no reason why the price of the futures would be any different than the current bitcoin price plus the interest needed to finance the purchase at expiration. I have not analyzed the futures in depth yet, but I suspect there is some uneducated speculation that is providing arbitrage opportunities for more professional investors.

I see there are 3300+ futures created, how are they created ? When there is a match between a trader who wants to bet that BTC will worth < than $Y and another who wants to bet that BTC will worth > than $X ?

Other than the fact that X and Y are equal in your assumption, then yes. When two parties agree on a futures price, a "trade" is executed and a contract between the two parties is created.

  • While no money is exchanged between the two parties. When the OP enters a contract some money will have to be held at the exchange. – rhaskett Dec 11 '17 at 20:40
  • @rhaskett True - I added that bit. – D Stanley Dec 11 '17 at 20:54
  • Thank you, I added questions to the main post, if you could read it :) – Nathan Vasse Dec 16 '17 at 14:32
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How do I know on what price each futures contract is configured? (The X in "Trader A: I bet that BTC will be worth X on 17 January, do you take the bet?)

Cash settled futures are usually tied to the open/close auction prices on a specific market on a specific day, specifically "XBT futures are cash-settled contracts based on the Gemini's auction price for bitcoin, denominated in U.S. dollars."

An auction, which is typically used for opening and closing a market, allows market participants to submit bids and offers for several minutes - at the end of the auction all auction orders are matched in a single transaction at a single price. At an opening auction the unmatched orders create the order book - the bid and ask prices. At a closing auction, the orders the unmatched orders simply don't trade at all.

Why exchanging futures? Why selling a futures contract? And why buying a futures contract?

Speculation (taking risks) and hedging (avoiding risks). Hedging comes in many forms.

Assuming you inherit $10'000'000 in bit coins, but won't have access to these coins for another 3 months, futures allow you to "lock in" the price of these bitcoins - that avoids risk.

Similarly, if you make a living by running an very profitable bitcoin related business, you want to have some money left if bitcoin crashes. In that case it's smart to use the excess profits to hedge against a bitcoin crash.

Why is the current futures price not the mirrored price of a BTC?

Interest and Volatility. Primarily interest. To buy bitcoins now and sell them 3 months from now, I will need to spend money for these 3 months. During these 3 months my money won't make interest. If I can earn 1% interest over the course of these 3 months by not buying bitcoin, and am willing to buy bitcoin at $100 now, I assume a fair price 3 months from now is $101.

I see there are 3300+ futures created. How are they created? When there is a match between a trader who wants to bet that BTC will be worth less than $Y and another who wants to bet that BTC will be worth more than $X?

These are 3300+ contracts. If there are 0 contracts, and I sell one and you buy one, there's 1 contract now. If you then sell your future to someone other than me, things get complicated, but I hope you can see the pattern.

When I buy a $17,800 futures contract, who gets the money?

The one who sold gets the money the one who bought pays the money. Then Clearers and Brokers enter the picture. Clearers and Brokers (depending on your level of market access) are in charge of making sure people can pay up if they trade on the market. At any given day, the seller needs to have sufficient money in their account to cover the maximal losses their clearer expects them to incur due to their short position. If they don't have sufficient money to cover the risk, the clearer will close the position, i.e. buy back the futures.


EDIT: There is some confusion (in your question and in the other answers) regarding margin accounts and such. I'll try to clarify:

Contracts are worth actual real money. Selling a contract means you receive that money, buying a contract means you spend that money. All of it. If you sell the contract you acquire a duty to honor that contract - that's where margins come into play: The clearer must ensure that you can honor the contract, because if you can't, the clearer will have to (what happens if they can't honor the contract is another interesting question). Margins are not money that's paid to someone - it's a safety deposit that's held in an account. Money only changes hands when contracts are bought or sold. Buying with a margin account is an entirely different issue, that luckily isn't directly relevant in the context of this question.

In general, you never let your future expire (unless you're able and willing to influence the final auction price). You either close your position by buying back or selling back the open contracts, or you roll the position.

  • Thank you, I added questions to the main post, if you could read it :) – Nathan Vasse Dec 16 '17 at 14:32
  • @NathanVasse updated – Peter Dec 16 '17 at 19:08
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How do I know on what price are each futures configured ? ( The X in "Trader A: I bet that BTC will worth X on 17 January, do you take the bet ? )

The "Last" Price was the (strike) price of the last bet between a Trader A and a trader B when they last checked between 0-10 minutes ago. The next bet (today) might be different as this website doesn't show the current market for that Jan17 future, but likely be close to the Last price.

Why exchanging futures ... So why selling a future ? And why buying a future?

Wikipedia has a detailed explanation of futures, but the main answer is that you can't bet on the price now as it is already known. So to bet on expected price movements you need to bet on a price in the future. You sell a future if you believe the price will be lower than the market price. You buy if you believe it will be higher.

Why the current futures price is not the mirrored price of a BTC?

The price for the Jan17 future is (currently) higher than the current price because the people buying and selling these futures generally believe that the price of bitcoin will go up by Jan 17 2018. So to make money buying a future you have to be correct that it will go up even farther than the futures price.

I see there are 3300+ futures created, how are they created ? When there is a match between a trader who wants to bet that BTC will worth < than $Y and another who wants to bet that BTC will worth > than $X ?

Yes, for each prior moment that $Y = $X. You need two parties to bet.

When I buy a $17,800 contract futures, who gets the money ? Because I guess I'm not betting against CBOE obsiouly .. ?

You technically are betting against the CBOE. Though the CBOE only takes the "bet" if they can match your bet immediately against someone betting the other way at the same price. That is why it is called an exchange.

It might be clearer to say you buy one future which is a bet over whether the price will be above or below $17800. You will have to give some money to the CBOE (called a margin) to the CBOE so the CBOE knows that you are good for the final result of the bet and they can pass that money on to the other person if you lose.

  • Could you clarify in your first answer the relationship between last and settle? – Hart CO Dec 11 '17 at 18:31
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    "You technically are betting against the CBOE." no - the CBOE is just a facilitator - you are betting against another party. – D Stanley Dec 11 '17 at 19:23
  • @DStanley Yes and no. While the exchange has matched you with another party, the exchange is technically the counterparty as if the other party defaults the exchange still pays. – rhaskett Dec 11 '17 at 20:31
  • @HartCO A settlement price is the agreed upon price of any particular contract. The Last price is the settlement price of the last contract anyone entered into just before whatever time the CBOE posted the data. – rhaskett Dec 11 '17 at 20:41
  • @rhaskett true, but the exchange does not take a position or set the price, so "betting against the CBOE" is not the term I would use. You are betting against another investor - the CBOE is just "holding the money", so to speak. – D Stanley Dec 11 '17 at 20:51

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