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What are Stablecoins?

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What are Stablecoins?

A Brief Look at Stablecoins

We focus primarily on digital securities, here at Securities.io. However, there is another notable trend in the world of blockchain, which is often intertwined with this new asset class. This would be the rapidly growing world of ‘stablecoins’. In this article we explore what are Stablecoins?

These stablecoins have inherent qualities that appeal to participants involved with digital securities. This makes them attractive to both issuers, and investors alike.

The Allure

So what exactly is it about stablecoins that makes them attractive to investors? The reasons vary in every case, but the following traits are the most obvious benefits these tokens afford.

  • Transparency
    • As these assets are blockchain based, anyone can view transactional history, since this data is stored on public ledgers. These inside looks can be obtained through use of various ‘block explorers’.
  • Efficiency
    • While FIAT transfers are at the mercy of banks, and often take a lengthy amount of time to be approved, stablecoins benefit from a lack of middle-men. Large and small denominations alike are able to be transferred directly between two parties. There are no holding periods.
  • Affordability
    • Building on the point made above, the lack of middle-men in a transaction is a good thing. This is one less mouth that needs to be fed. The result of this is lower transaction fees, as there is no need to pay a cut to a bank.
  • Volatility
    • This is undoubtedly the largest draw for many towards stablecoins. The entire foundation of the idea they are built upon, is to provide their holder with financial stability. This is afforded to the hold by ‘pegging’ the stablecoin to a traditionally non-volatile asset. This most often means national currencies, such as USD, CAD, FRANC, EUR, etc. Although, there are various instances of stablecoins being pegged to commodities such as maple syrup, gold, and more.

These qualities also just happen to appeal to those involved in digital securities, leading investors to see the appeal of both. Digital securities are a means of taking part in the world of blockchain, while ensuring compliance with regulations. The results are investment opportunities that are more predictable, and backed by real world assets- both traits offered by stablecoins.

Flexible Pegging

While the points noted above may sound fantastic when applied to a financial asset, they are not givens. These point are strived for, but not always attained. For example, it was recently verified that industry leading stablecoin, ‘Tether’, does not maintain 1:1 reserves of USD in their accounts.

While this has long been suspected by many involved in the world of cryptocurrencies, it has only now been verified in an affidavit signed by a lawyer working with Tether. The following is a brief excerpt from this recent statement.

Tether has cash and cash equivalents (short term securities) on hand totaling approximately $2.1 billion, representing approximately 74 percent of the current outstanding tethers.”

The Story Thus Far

To elaborate on the sticky situation in which Tether finds themselves, the New York General Attorney recently issued a statement condemning the company’s practices. In these statements, it was said that Tether reserves were used by sister company, BitFinex, to cover losses of investor funds – coming in to the tune of roughly $900 million. It is believed that, not only did these actions take place, but they were intentionally hid from the public.

In the days following these statements, BitFinex has denied any wrong-doing, and indicates that they have not lost any funds. They were, rather, locked-up by their payment processer, Panama based, Crypto Capital, due to an inability to prove ownership.

The point in raising awareness to this story, is that the status as the ‘go-to’ stable coin, held by Tether, is tenuous at best. Now is the time for any contenders to step up and usurp Tether in their bid for dominance; a dominance that may be achieved by cozying up with the world of digital securities.

The situation continues to unfold as the investigation continues.

Coincidence?

Some have noted that there is a common denominator seen in, both the unfolding Tether situation, and that of embattled Canadian exchange, QuadrigaCX; this would be payment processer Crypto Capital.

Much of the woes experienced by both Tether and QuadrigaCX stem from each having significant sums of money ‘locked-up’. In time, investigators hope to shed more light on how each of these companies found themselves in their respective situations, and whether Crypto Capital has played a role in the demise of each.

Viable alternatives

Despite the recent woes of industry leading, Tether, stablecoins appear to have as bright a future as ever. Various companies have, both, recognized this, and contributed towards it being true. While options are plentiful, a few offerings stand out from the pack as viable replacements for Tether.

TrueUSD (TUSD) | TrueGBP (TGBP) | TrueAUD (TAUD) | TrueCAD (TCAD)

Each of these four stablecoins are products of mother company, TrustToken. All of these tokens are backed 1:1 by each’s respective FIAT currency. TrueUSD, in particular, has seen high levels of adoption, and can actively be traded on a variety exchanges, such as Bittrex, Binance, UpBit, and more.

TrustToken is a promising company which specializes in the tokenization of real-world assets. While TrustToken can be used to tokenize assets such as real-estate, art, and more, it is their implementation, with regards to stablecoins pegged to various FIAT currencies, which has caught the attention of many.

TrueUSD saw its exclusive use in a recent STO, hosted by Blockport.

 

Gemini Dollar (GUSD)

A product of Gemini exchange, Gemini Dollar (GUSD), is another token backed on a 1:1 ratio by USD. The purpose of this stablecoin is to provide investors with an asset that behaves in a predictable manner like USD, but benefits form the inherent qualities of blockchain. This stablecoin is based on the ERC-20 standard, meaning that it functions on the Ethereum blockchain.

This particular stablecoin touts itself as the first of its kind to be regulated. This regulation comes in the form of monthly audits by accounting firms, custody provided by State Street Bank and Trust Company, and through licensing granted to Gemini by the State of New York.

Adoption, thus far, has resulted in GUSD being traded on a variety of exchanges, in addition to establishing partnerships with tokenizing platforms such as Harbor.

 

USD Coin (USDC)

Circle is a United States based company which has made headlines over the past two years through their purchase of Poloniex, and public statements indicating an eventual foray into digital securities. Along the way, Circle has noted both digital securities and stablecoins as growing trends, and sought to take part. This resulted in the creation of USD Coin (USDC).

As its name implies, this Ethereum based asset is pegged to the US dollar at a 1:1 ratio. The goal is to provide its holders with a means for maintaining consistent buying power, in an industry known for its volatility.

Recent adoption has seen Securitize announce their support of USDC through their industry leading tokenization services.

 

It is important to remember that these are only three of the most viable alternatives to Tether. More offerings are popping up every day, and none have attained #1 status, or any semblance of dominance. As the situation with Tether unfolds, watch closely as the markets react and begin turning to rival stablecoins.

With development of digital securities booming, and a sky-high ceiling for the sector, perhaps the best indicator of which stablecoin stands to inherit Tether’s crown, is the one which sees the most adoption in the burgeoning sector.

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Joshua Stoner is a multi-faceted working professional. He has a great interest in the revolutionary 'blockchain' technology. In addition to this, he is a licenced Paramedic in Nova Scotia, Canada. As such, he can provide emergency care/medicine to any situation necessitating it.

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What is Blockchain Technology?

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What is Blockchain Technology?

Its been almost ten years since Satoshi Nakamoto first introduced Blockchain technology to the world in his 2008 Bitcoin Whitepaper. Since that time, these revolutionary networks have gained popularity in both the corporate and governmental sectors. This growth is easily explained when you consider that blockchain technology provides the world with some unique advantages that were previously unimaginable. Consequently, today, you can find blockchain technology in nearly every sector of the global economy.

What is Blockchain Technology?

A blockchain is a network of computers that share a distributed ledger across all network participants (nodes). This strategy is far different than say, fiat currencies that originate from a centralized authority figure. Importantly, this ledger keeps an unbroken chain of transactions since the birth of the network. This “chain” of transactions grows larger as new “blocks” of transactions are approved and added to it.

Bitcoin Whitepaper

Bitcoin Whitepaper

In order to approve new transactions, each node works together with others to validate new blocks. Additionally, the nodes also validate the current state of the entire blockchain. In order for a new block of transactions to be added to the blockchain, they must receive approval from 51% of the network’s nodes. Nodes are also referred to as miners. In this manner, blockchain networks are decentralized networks that provide unmatched security to the world of digital assets.

Security via Decentralization

Decentralization is an important aspect of blockchain technology because it makes these revolutionary ledgers immutable and unalterable. In fact, since there is no centralized attack vector, hacking a blockchain is nearly impossible. The larger the blockchain network, the more secure the data on it remains.

For example, let’s look at the world’s largest blockchain, Bitcoin. Currently, the Bitcoin blockchain has over 10,000 active nodes located across the globe. This distribution means that in order for an attacker to alter even just one tiny piece of information on the blockchain, they would need to successfully hack 5,000+ computers at once.

While this task may not be impossible for the quantum computers of the future, it’s so unprofitable that it makes no sense to even attempt such a monumental task. Additionally, on top of successfully hacking 5000+ computers at once, an attacker would also need a supercomputer to recalculate the new blockchain transactions in time to introduce them into the network. It would literally be more affordable to create a new cryptocurrency from scratch.

Consensus Mechanisms

One of the reasons why blockchain networks are so secure is the integration of consensus mechanisms. Consensus mechanisms are cryptographic protocols that leverage the participants of a blockchain network in securing its data. In the case of Bitcoin, the Proof-of-Work (PoW) consensus mechanism is used.

Proof-of-Work (PoW)

The Proof-of-Work consensus mechanism was revolutionary to the world of cryptography when it was first introduced years prior by Adam Back in his Hashcash whitepaper. In the concept, Back describes the integration of a mathematical equation to the network’s security protocols. In this way, every computer can show “proof” of their work securing the network.

Miner Rewards

It’s important to understand that nodes receive a reward for their mining efforts. These rewards adjust automatically depending on the network’s difficulty and value. In the case of Bitcoin, miners originally received 50 Bitcoin for their efforts. Today, this seems like fortune, but back in 2009, Bitcoin was only worth pennies. As the value of the token rises and the network goes, the mining rewards shrink. Today, Bitcoin miners receive 6.5 BTC if they add the next block to the chain.

SHA-256

Notably, every node validates and secures the blockchain, but only one gets to add the next block of transactions to the network. To determine who the next miner is that gets to add this block, every computer competes in a mathematical race to figure out the PoW equation. In the case of Bitcoin, the equation is known as SHA-256. Importantly, the first SHA algorithm dates back to Hashcash. This early version of the equation was known as SHA-1.

Bitcoin Consensus Mechanism - SHA-256 - Blockchain Technology

Bitcoin Consensus Mechanism – SHA-256 – Blockchain Technology

Notably, the SHA-256 equation is so difficult that it’s easier and more efficient for your computer to just make random guesses rather than attempting to figure out the equation directly. The answer to the equation must begin with a predetermined amount of 0s. In the Bitcoin blockchain, the equation’s answer must start with four zeros. However, if the network’s congestion rises, so does the difficulty of these equations. This difficulty adjusts by the addition of another zero at the beginning of the required SHA-256 answer.

Similarly to traditional commodities such as gold, there are costs that are associated with the creation and introduction of these digital assets into the market. These random guesses utilize intense computational power. This power equates to real-world costs such as electricity bills. Studies have shown that securing the Bitcoin network can use more electricity than required by entire countries. Luckily, over 80% of Bitcoin’s power consumption comes from renewable sources such as solar or hydroelectric.  This cost of mining also adds measurable value to each Bitcoin.

Miners

As Bitcoin began to gain in profitability,  its network’s computing power expanded significantly. In the beginning, nodes, also known as miners, could mine for Bitcoin using nothing more than your home PC. Eventually, miners realized that graphic cards were far better at the repetitive guessing required to figure out the SHA-256 algorithm. This led to a computational race in the market.

ASIC

Eventually, large blockchain firms such as Bitmain introduced Application Specific Integrated Circuit (ASIC) miners into the equation. These purpose-built miners were thousands of times more efficient at guessing the SHA-256 algorithm than the GPUs and CPUs before them. Consequently, their introduction created a scenario in which the average miner now needed to invest thousands in mining equipment to stay relevant.

Mining Pools

Luckily, some creative minds in the field began to think of ways to level the playing field out again. They developed “mining pools.” A mining pool is a network of miners that all share computational power for the common goal of mining blockchain transactions. Importantly, mining pool participants receive a percentage of the reward based on their contributions to the network’s overall hash (computational power).

Importantly, over the last three years, there has been a push to move away from power-hungry consensus mechanisms such as PoW. This desire to secure blockchains in a more efficient manner has led to the development of some truly unique consensus mechanisms in the sector.

Proof-of-Stake (PoS)

The Proof-of-Stake mechanism does away with the difficult mathematical algorithms and instead utilizes a more psychological approach to securing the network. In a PoS blockchain, users don’t need to compete mathematically to add the next block to the blockchain. Instead, PoS users “stake” their coins via network wallets to secure the network. The way staking works is simple.

Keeping a certain amount of coins in your wallet allows you to participate in transaction validations. The more coins you stake, the more likely the chances are you get to add the next block of transactions to the network. In most PoS systems, a miner from those with the most tokens staked at the time receives the chance to add the blocks.

The advantages of a PoS consensus mechanism are immediately evident. For one, you don’t need to pour tons of resources into your network to keep it safe. Additionally, since nodes are chosen based on their amount of staked coins, there is never a scenario in which a node gains anything from validating incorrect transactions. Basically, a hacker would have to fully invest in the cryptocurrency prior to attacking the network. In this way, PoS systems create a huge deterrent to attackers.

The Future of Blockchain Technology

Blockchain technology has come a long way from its early days as a means to secure cryptocurrency networks. Today, blockchain technology has numerous uses across every type of industry imaginable. Specifically, blockchain programs have impacted the logistical, financial, and data security sectors in a major way.

Blockchain Technology Logistics

Blockchain logistical systems are more efficient and cost-effective to operate than traditional paper-based models. In fact, the immutable and unalterable nature of blockchain tech makes it ideally suited to logistical tasks. Soon, you may be able to ascertain much more information regarding the creation and delivery of your products thanks to these new-age systems emerging.

Blockchain Logistics

Blockchain Logistics via GlobalTranz

Fundraising

Blockchain technology has also altered the way in which businesses raise funds. In a traditional corporate crowdfunding strategy such as an IPO, companies must balance between cost-effectiveness and participation. The inability to process smaller transactions meant that for the longest time, companies had to turn away potential investors. Nowadays, blockchain technology enables businesses to easily automate these procedures via smart contracts.

Smart Contracts

Smart Contracts feature preprogrammed protocols that execute when they receive a certain amount of cryptocurrency sent to their address. These contracts live on the blockchain and enable remarkable functionality. For example, in the case of fundraising, a smart contract can automate processes such as the approval of investors and the distribution of funds.

Blockchain Technology Today

You can expect to see further expansion of the blockchain sector in the coming months as more governments and institutions explore its benefits. For now, the blockchain revolution is well underway.

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What are Cryptocurrencies?

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What are Cryptocurrencies?

As an informed investor, you need to understand what cryptocurrencies are, and how they continue to alter the financial sector globally. At their core, cryptocurrencies are internet-based decentralized mediums of exchange. These unique financial instruments differ from traditional fiat currencies in some key ways.

Unlike, say the US dollar, cryptocurrency issuance and transactions aren’t controlled by a central organization. Instead, a group of computers known as a blockchain all work together to secure and operate the network. Consequently, this makes blockchain networks far safer than traditional systems because there is no centralized attack vector.

Importantly, blockchain technology provides a more secure and efficient market experience. It’s both immutable and unalterable. These attributes make it ideal for peer-to-peer transactions.

In this way, cryptocurrencies provided the world with one of the first successful alternatives to government-backed currencies. In the case of cryptos, such as Bitcoin, a combination of private and public keys enables p2P cryptographic transactions via a distributed ledger.

The History of Cryptocurrencies

The history of cryptocurrencies starts in 1998. At that time, the internet was gaining popularity. However, it would still be nearly almost half a decade before high-speed became popular. Interestingly, it’s recorded that a computer engineer by the name of Wei Dai first introduced the concept of cryptocurrencies via his B-money concept. In the paper, he proposed a digital form of money that utilized a privacy protocol to create an anonymous cash system.

Nick Szabo via Twitter - What are Cryptocurrencies

Nick Szabo via Twitter – What are Cryptocurrencies

Later in the year, another, now well-known programmer by the name of Nick Szabo introduced the BitGold concept. Szabo felt that decentralization needed to be at the core of any digital currency to prevent centralized manipulation. Sadly, neither of the projects made it to the market. However, they did inspire the infamous creator of Bitcoin – Satoshi Nakamoto.

Double Spend Issues

One of the main hindrances to the development of a reliable form of digital money was the problem of double-spending. Double spend is when a hacker uses the same digital currency more than once. It’s a huge issue that boggled some of the most advanced computer minds of the time.

To create a reliable digital currency, someone would need to figure out how to make a digital asset that was, somehow, usable only once. Additionally, it needed to be impossible to duplicate or counterfeit to serve its purpose. The issue of double-spending isn’t a concern for the traditional financial system because banks utilize third-party verification systems. Additionally, they operate a centralized system that allows edits, refunds, and corrections.

Hashcash

In 2002, now famous Bitcoin programmer Adam Back began to unravel parts of the double-spend mystery. He proposed some form of system to ensure that each network participates played their part. Specifically, Back proposed that Hashcash utilize a decentralized system that required users to complete a difficult mathematical equation to process a transaction.

Importantly, this strategy cut down on malicious intentions because it required a hacker to utilize a huge amount of computational power to gain entry into the network. This new form of network consensus became known as the Proof-of-Work (PoW) algorithm. Today, PoW algorithms are found in all types of cryptocurrencies.

Bitcoin Changed Everything – What are Cryptocurrencies?

In 2008, Satoshi Nakamoto introduced the world to its first cryptocurrency – Bitcoin. Bitcoin was a major milestone for many reasons. It marked the first succesful decentralized cash system to function utilizing a “Non-trust based system.

Instead of a centralized network, Bitcoin relies on an international network of transaction validators known as “nodes” or “miners.” A node’s main purpose is to secure the network through the validation of “blocks” of transactions. In the case of Bitcoin, these blocks appear every ten minutes and contain 1MB of data.

Bitcoin Whitepaper

Bitcoin Whitepaper

Importantly, all the nodes validate transactions, but only one gets to add the block to the chain of transactions forming the “blockchain.” For his help in the inspiration, Satoshi gave a nod to Adam Back’s HashCash project. He spoke on his previous work in his communications when he stated  “we will need to use a proof-of-work system similar to Adam Back’s Hashcash.”

Double Spend Solved

Satoshi was able to solve the double-spend issue via the introduction of a timestamp into the consensus algorithm. A consensus algorithm is a cryptographic function used to secure a network. In the case of Bitcoin, this algorithm is known as SHA-256. In the early days of PoW, HashCash utilized the SHA-1 PoW algorithm.

Critically, each block in a blockchain contains portions of the hash from the previous block. Each block also contains a timestamp. In this manner, a blockchain is really just one long mathematical equation. Consequently, this strategy makes blockchain networks incredibly difficult to hack.

For one, you would need to recalculate the entire blockchain from the start which would require a ton of computational power. Additionally, you would need to hack over 51% of the blockchain to ensure that your new blockchain is approved by validators. In the case of Bitcoin, that equates to hacking over 150,000 computers simultaneously. Consequently, it’s would cost more than the value of all Bitcoins to hack the network.

Miner Rewards – What are Cryptocurrencies?

The first node to complete the SHA-256 algorithm gets to add the next block to the transaction chain and receives a reward for their mining efforts. Think of this reward as a refund for the computation and electrical contributions put into the network. Originally, this reward was 50 Bitcoin. Of course, back then, Bitcoin was worth only pennies. Today, the block reward is 6.25 coins per block. At today’s pricing, that is just around $60,000 worth of Bitcoin.

Intelligently, miner’s rewards automatically decrease by 50% every 210,000 blocks. On average this halving occurs approximately every 4 years. The first halving transpired on November 28, 2012. The second halving took place on July 9, 2016. Lastly, the final halving to occur happened just this year on May 11, 2020.

Mathematical Monetary Supply

Mining rewards also serve another purpose within Bitcoin’s ecosystem. Crucially, it’s the only time new Bitcoin is introduced into the blockchain. In this way, Bitcoin provides a predictable monetary supply that can’t be manipulated such as with central bank currencies.

Additionally, because Bitcoin is finite with only 21 million slated for release, it enjoys growing scarcity as time passes. Currently, there are already 87.68% of Bitcoin mined. That equates to 18,413,369 BTC in circulation today. Of these coins, about a million reside in Satoshi Nakamoto’s wallet. These coins haven’t moved since Nakamoto first mined them during the early days of the coin’s release.

Notable Bitcoin Dates

October 31, 2008, is the date that Satoshi Nakamoto chose to change the world forever. It’s on this day that he first published the Bitcoin Whitepaper. In the paper, he gives insight into his concept and how he solved the double-spend problem.

Two years later, Bitcoin took a major leap into the economy after the first real-world purchase occurred. On May 2, 2010, an early Bitcoinist by the name of Laszlo Hanyecz made Bitcoin’s first real-world transaction. He ordered two pizzas from his local Jacksonville Florida shop.  The price he paid for those delicious pies and a slice of Bitcoin history was 10,000 Bitcoin. That’s around $90,000 in today’s market.

Crypto Exchanges

By March 2010, the first crypto exchange entered the market. The now-defunct platform went by the name bitcoinmarket.com. It allowed users to buy, sell, and trade Bitcoin. The same year, the now infamous Mt.Gox crypto exchange took trading to the next level.

Mt.Gox Investor After 650,000 BTC Go Missing

Mt.Gox Investor After 650,000 BTC Go Missing

New Cryptocurrencies

No one can say for sure if Satoshi Nakamoto predicted the birth of the crypto market, but it wasn’t long after his invention that the advent of crypto exchanges led to the development of other popular cryptocurrencies. At first, these cryptos resembled Bitcoin with a few minor tweaks, such as larger block sizes.

A perfect example of these early cryptocurrencies is Litecoin. According to Litecoin’s creator, Charlie Lee, he developed the token to serve as silver to Bitcoin’s gold. As such, Litecoin shares the same cryptographic functions as Bitcoin albeit with some miniscule changes.

By 2013, there were ten major cryptocurrencies trading in the sector. It’s here that you see cryptocurrencies begin to emerge with more functionality and alternative purposes in the market. For example, the introduction of Ethereum brought smart contracts to the forefront of the crypto space.

Smart Contracts – What are Cryptocurrencies?

Smart contracts feature preprogrammed protocols that execute upon receiving a specified amount of cryptocurrency. These automated protocols provided crypto users with advanced options. As such, Ethereum ushered in a new age of functionality in the crypto realm. Today, smart contracts reside at the core of the crypto sector.

Another example of the shifting landscape of the cryptocurrency sector is Ripple. This early cryptocurrency entered the market with a very unique strategy. Unlike Bitcoin, which many see as a means to replace the current financial system, XRP is meant to provide banks with access to blockchain technology and all of its advantages.

All-Time High

In December 2017, Bitcoin reached an all-time high of around $20,000. It was here that scalability concerns reached a fevered pitch. The huge influx of Bitcoin users had left many in the crypto sector to state that Bitcoin was unable to full fill its primary purpose as a “peer-to-peer electronic cash system.” These concerns eventually led to various hard forks and the development of the Lightning Network.

New Cryptos Emerge

Importantly, a hard fork occurs when a new cryptocurrency launches from the blockchain of another crypto. The new cryptocurrency shares all the previous transactions of the original cryptocurrencies blockchain but all future transactions are placed on a new ledger. Consequently, miners of the old blockchain are unable to mine the new currency without updating their nodes.

Hard Forks

Hard Forks are often controversial in the market. For example, Bitcoin Cash came as a result of a split in the Bitcoin community regarding an increase in the block size from 1MB to 2MB. Even after the hard fork, tensions still remained high in the community as many believed that the team from Bitcoin Cash wanted to hijack Bitcoin. Reversely, Bitcoin Cash supporters argued that Bitcoin was failing in its current state to serve its primary purpose.

Alternatives to the PoW Algorithm

As more cryptocurrencies emerged, so did alternative ways to secure blockchains. Notably, the Bitcoin PoW consensus system utilizes an incredible amount of computer processing power. Consequently, the entire network requires a huge amount of electricity to function. In the past, studies have shown that Bitcoin uses more power than some countries.

Proof-of-Stake via Ledger

Proof-of-Stake via Ledger

This power consumption led to the development of other, less power-hungry options such as the Proof-of-Stake (PoS) consensus mechanism. In a PoS system, users receive rewards for keeping a certain amount of their cryptocurrency in a network wallet. These “staked” coins help verify the status of the network. Importantly, the more coins you stake, the more transactions you validate.

This strategy works well because it would require any hacker to stake a large amount of cryptocurrency to enter the network. As such, they would be forfeiting all of their funding if they were to then attack the blockchain responsible for securing their staked tokens. Notably, Ethereum plans to convert over to a PoS consensus system by the end of 2021 according to developers.

Lightning Network

The Lightning Network emerged as another option for those seeking to alleviate Bitcoin’s blockchain congestion. The Lightning Network utilizes private payment channels that reside off-chain. In this way, users can conduct unlimited transactions without bogging down Bitcoin’s network. Only once the private payment channel closes, do the transactions add to the blockchain. Additionally, the Lightning Network introduced a host of new functionality to the world’s first crypto.

Cryptocurrencies in the Future

Cryptocurrencies continue to revolutionize the concept of money. You can expect to see these unique financial instruments take center stage in the coming years as many of the world’s most powerful fiat currencies appear to be mathematically unsound. For now, the world still debates on how to handle these new-age currencies with new regulations emerging monthly.

 

 

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What are Bitcoin Futures?

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What is Bitcoin Futures

The introduction of Bitcoin Futures to the financial sector has had some significant effects on the market. These unique financial instruments enable savvy investors to leverage Bitcoin’s volatility without actually holding any Bitcoin. This scenario is ideal for large scale investment firms and those seeking to avoid investing in unregulated markets, such as cryptocurrencies.

Primarily, Bitcoin Futures function similar to stock or commodities futures. Simply put, a Future is a legal agreement to trade a commodity at a predetermined price and date. In this way, Futures allow investors to speculate on the future price of any given commodity. Consequently, Futures play a critical role in the financial sector.

For example, imagine a gold mining firm and how it might utilize futures to its benefit. The miner continues to unearth precious metals as inventors seek to secure their holdings at the current prices. As the product doesn’t exist yet, there are still price fluctuations that could hinder or boost profits. To buffer the risk involved in this investment, the miner may decide to agree to sell their precious metals at a predetermined price and date.

Kraken Futures Trading Terms via Homepage

Kraken Futures Trading Terms via Homepage

In this way, they can ensure they receive their minimum required ROI. Reversely, an investor would seek to acquire a futures contract for less than what they predict the market value of gold will be at that time. Consequently, this maneuver provides more room for profits on the back end. The difference between the price of the future and the actual price of the commodity at the time of the sale is the investor’s profit.

Risks Exist

It’s important to mention that futures are not foolproof investments. The scenario could occur where the price drops and the investor is stuck with a future that is over-priced. This is the situation that occurred shortly after the launch of Bitcoin Futures in late 2017.

As the latter example shows, it takes an experienced investor to leverage futures properly. Critically, you will need to have a firm understanding of the market cycles and fluctuations if you intend to make a profit trading futures. That being said, there are some undeniable benefits Bitcoin Futures introduce to the sector.

Benefits of Bitcoin Futures

In the case of Bitcoin Futures, the advantages are too great to ignore. For one, Bitcoin Futures trade on regulated exchanges. Currently, you can access Bitcoin Futures on some of the most reputable exchanges in the US including CME, Bakkt, and CBOE. Importantly, these platforms receive regulation directly from the Commodity Futures Trading Commission.

Regulated exchanges are more secure than their crypto alternatives. In the past, investors incurred major losses after the collapse of unregulated crypto exchanges. In one now-infamous instance, the largest crypto exchange at the time, Mt.Gox, collapsed after a hack left the exchange in financial ruins. Sadly, the collapsed exchange cost investors millions. Worst of all, investors had no recourse because the platform was unregulated.

Cash settlement

Another major advantage of Bitcoin Futures is that they settle in cash. This makes sense once you realize that no actual Bitcoin trading occurred. In fact, the investor and the exchange never own any Bitcoin during the transaction. Rather, an agreement to trade Bitcoin in the future at a set price trades. This strategy means that Bitcoin Futures investors don’t need to own a Bitcoin wallet or any other crypto-supportive software to participate.

Crypto Shorts

Another advantage Bitcoin Futures bring to the market is the ability to short. Shorting is an investment strategy where an investor enters into a trade with the goal to profit from a drop in the market value of an underlying asset. Because Futures pricing updates daily, investors can short futures by repurchasing their contract at a lower price.

Keenly, you can continue to repurchase your futures contract at a lower and lower price as the market drops. In this way, investors can see huge profits during times of market losses. However, it’s also important to mention that large scale shorting puts negative pressure on the market value of an asset.

Bitcoin Futures via CME
Bitcoin Futures via CME

Margin Trading

One of the most attractive attributes about trading futures is that you only need to put a percentage of the contracts total down to trade. This percentage, known as the margin, ranges from 10-20%. Importantly, this strategy allows investors to leverage their position to maximize profits. In essence, investors gain unlimited profit potential. Reversely, there is unlimited loss potential as well.

History of Bitcoin Futures

Bitcoin futures existed as an unregulated financial instrument prior to 2017.  However, it wasn’t until the end of that year that Bitcoin Futures appeared on regulated exchanges. Specifically, in December 2017, both the Chicago Board Options Exchange (Cboe) and the Chicago Mercantile Exchange (CME) introduced Bitcoin Futures. Notably, the issuance of these futures provided a boost to Bitcoin’s market value. Specifically, Bitcoin rose by 10% on news of the succesful launches.

The issuance of a third Bitcoin Futures contract by CME helped catapult Bitcoin to its all-time high of just over $20,000. However, the excitement was short-lived. The following year saw the cryptomarkets enter into a year-long bear market that saw Bitcoin’s price drop from over $20,000 down to just over $3,000.

While many speculated the price drop was due to scalability issues within the Bitcoin network, the Federal Reserve Bank of San Francisco suggested that Bitcoin futures were one of the main contributors to the drop. The reasoning behind this allegation is the introduction of shorts to the market.

Bitcoin Futures – Issues to Address

Bitcoin Futures are set to play a critical role in the market moving forward. As such, they continue to be at the forefront of any cryptocurrency discussion. Specifically, non-profit clearing houses have voiced concerns over market manipulation in the past. Despite these concerns, you should expect to see even more Bitcoin Futures entering the market in the coming months.

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