Abstract: This article deeply analyzes Bitcoin contracts: interpreting the reasons behind the premium. Currently, the trading volume of Bitcoin futures contracts is continuously increasing, but the phenomenon of premiums for these contracts has also persisted. This article interprets the reasons for Bitcoin contract premiums from four aspects: the background of the Bitcoin market, the reasons for the opening of futures contracts, the impact of increasing trading volume on premiums, and an analysis of market fundamentals.
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- Background of the Bitcoin Market
Bitcoin is a digital currency, and its decentralized nature makes it a more anonymous and secure payment method compared to traditional currencies. Once associated with the financial market, Bitcoin has become a highly influential tool, drawing the attention of more global investors to this industry.
The Bitcoin market has always been highly volatile, but at the end of 2017, the price of Bitcoin surged significantly, attracting interest from both individual and institutional investors. At the end of 2017, the Chicago Mercantile Exchange launched Bitcoin futures contracts, followed by the Chicago Board Options Exchange introducing its own Bitcoin futures contracts, making Bitcoin contracts gradually a highlight in the global market.
- Reasons for the Opening of Futures Contracts
In the ordinary spot market, Bitcoin prices fluctuate greatly, exposing investors to significant market risks. Futures contracts provide investors with a mechanism for risk hedging. Investors can determine future buying and selling prices when opening positions, avoiding risks brought about by market fluctuations.
Additionally, futures contracts allow investors to use leverage for investment. Investing in many Bitcoins requires a substantial amount of capital. However, futures contracts allow investors to trade the corresponding contracts by only paying an initial margin, improving capital efficiency.
For exchanges, futures contracts can bring significant profits, especially when the Bitcoin market is booming. Moreover, futures trading can also bring more liquidity to exchanges, as they act as intermediaries, allowing investors to trade Bitcoin futures contracts on the same platform.
- Impact of Increasing Trading Volume on Premiums
Premium refers to the phenomenon where the price of futures contracts is higher than the related spot price. As the trading volume in the Bitcoin market continues to increase, the trading volume of futures contracts is also gradually rising. However, with the increase in trading volume, the differences between the Bitcoin spot market and the futures market have also been exposed, leading to the premiums of Bitcoin contracts.
Specifically, due to the price differences between the spot market and the futures market, some traders will turn to trade in the futures market or the spot market, resulting in premiums between the two markets.
Futures trading participants are usually dominated by institutions, while retail investors mainly dominate the spot market. Since institutional clients typically have much larger positions, especially in a market like Bitcoin, they require more capital to reduce risk. When futures trading shows a premium, institutional clients can buy futures, pay cash to investors, and use Bitcoin as collateral.
- Analysis of Market Fundamentals
Market fundamental analysis is a method for assessing the fundamental factors that influence the market in investments. Through market fundamental analysis, we can understand the reasons for Bitcoin contract premiums from various aspects.
For an investment asset like Bitcoin, market fundamental factors play a certain role. The reduction in Bitcoin supply, halving cycles, etc., are among the reasons leading to contract premiums.
Market psychological factors can also impact contract premiums. The fluctuations in Bitcoin prices can trigger various emotional responses, especially changes in risk preferences among investors due to different national policies and decisions by regulatory agencies, leading to the emergence of contract premiums.
The formulation of market trading rules also has a certain impact on contract premiums. For example, both CBOE and CME require contracts to be cash-settled rather than distributed in Bitcoin, which is also a reason for the occurrence of contract premiums.
- Conclusion
The reasons for Bitcoin contract premiums are multifaceted, including the background of the Bitcoin market, the reasons for the opening of futures contracts, the impact of increasing trading volume on premiums, and market fundamental analysis. The price differences between the two can also create opportunities for conversion, further heating up the market.
This article provides investors with a more comprehensive understanding of the market through a deep analysis of Bitcoin contracts: interpreting the reasons behind the premiums.