Whether listening in on a conversation with co-workers, waiting in the checkout line at the grocery store, talking with family over the holidays, or seeing headlines on the news you most likely have heard about Bitcoin and the cryptocurrency craze.
So what is the hype all about?
Bitcoin was first introduced in 2009 by Satoshi Nakamoto with the purpose to serve as a peer-to-peer electronic payment network. Bitcoin differs from traditional fiat currencies in the respect that it is solely digital and does not require a third party to clear and settle transactions.
Early adopters of the cryptocurrency include merchants and consumers across the globe that saw the benefit of lower transaction costs relative to credit and debit cards as well as the blockchain technology that Bitcoin operates on.
This blockchain technology makes transactions on the system mathematically impractical to reverse by time-stamping the verified transactions with digital signatures serving as a proof of record that a given transaction occurred. Each validated transaction is combined, or “hashed” into a block of other verified transactions and these blocks are compounded on top of each other to create the blockchain, similar to a long chain of metal links.
The transactions are verified by Bitcoin miners, or CPU nodes that solve complex computer algorithms, who are awarded 12.5 Bitcoins for each 10-minute blockchain that is validated. Although these transactions are published to a public ledger, they are linked to a key of 30 alphanumeric characters similar to an address or handle so that actual personally identifiable information remains anonymous.
This public record of hashed verified transactions could save merchants billions of dollars lost to chargebacks since the transactions are identifiable and extremely difficult to reverse. This clawback loss write-off experienced by merchants is becoming increasingly prevalent seeing that retail commerce chargebacks are estimated to grow an astounding 300 percent over the next 4 years to $31 billion.
This growing popularity and recognition has championed the cryptocurrency’s exponentially rising price that could potentially shoot much higher with big players such as CME Group and Cboe acknowledging Bitcoin’s validity.
Nonetheless, any event that turns sentiment negative may possibly trigger large selloffs.
This has occurred multiple times in the past. In February 2014 the largest Bitcoin exchange in the world at the time, Mt. Gox, was infiltrated by hackers who stole over 700,000 Bitcoin. This led to a 60 percent decline in price over the following 12 months.
More recently, Bitcoin lost nearly 20 percent of its value in a single day after skyrocketing to record highs as exchanges across the world were shut down due to increased volume which prevented users to purchase or sell the cryptocurrency.
Buying and selling Bitcoin on a number of exchanges still has some challenges. Obstacles include confusion that surrounds setting up an online wallet for storing purchased Bitcoin on exchanges such as Coinbase, no clear regulation or insurance on funds, fuzzy currency exchange rates and hefty fees – all of which deter many from getting involved with Bitcoin.
Additionally, skeptics of Bitcoin’s meteoric rise in price have had no way to short the market. But with the cryptocurrency gaining more credibility across the world, exchanges are beginning to offer ways for investors and speculators to take part in the market.
Cboe’s Bitcoin futures contract recently launched on December 10th and it has already been a wild ride with trading halted a few times and price swings from 14,710 to 19,330 in their contract expiring March 2018.
CME Group will also begin trading futures contracts on Bitcoin, but both offerings appear to be suitable only for large, well-capitalized institutions and not the individual trader looking to get involved in Bitcoin.
For example, the CME Group contract trades at 5 times the value of the underlying Bitcoin and individuals would need to go through a broker instead of trading directly on the exchange. Due to the risk associated with Bitcoin’s volatile price fluctuations, some brokers have stated that clients will need to post double the exchange listed margins of 47 percent to a staggering 94 percent value of the contract unless a client has a minimum account value of $5,000,000.
Clearly, this excludes the vast majority of the population who may be interested in trading Bitcoin and reserves this market as the playground only for institutions or the wealthiest of individuals.
On December 18, 2017, North American Derivatives Exchange (NADEX) will begin listing a Bitcoin spread contract that will trade at one-tenth the price of Bitcoin, meaning that a $10 move in the price of Bitcoin equates to a $1 change in the value of the NADEX spread contract.
Now individuals who want to get involved in Bitcoin can do so directly through the exchange without the need to go through a broker. The hassle-free process to open and fund an account, week long contract durations, minor collateral requirements, lower trading fees, and superior risk to reward offering provides traders with a better opportunity to join the cryptocurrency craze.
Whether you want to catch Bitcoin’s ballooning price past its already astounding year-to-date return of 1,557 percent, are waiting for a pullback to find a strategic entry point, or anticipating the Tulip Mania-like bubble to burst, NADEX Bitcoin spread contracts will allow you to trade both sides of the volatile market and allow individual traders to fuel their Bitcoin buzz.