Bitcoin is still all the rage, and recently, a new thing called Bitcoin “futures” became available through reputable exchanges here in the United States. What are bitcoin futures and why might they be a FAR BETTER way to invest in Bitcoin through your IRA versus direct ownership? I’m Bryan Ellis. I’ll give you the answer right now in Episode #292 of Self-Directed Investor Talk.
Hello, Self-Directed Investor Nation! Welcome to the broadcast of record for savvy self-directed investors like you, where in each episode, I help you to find, understand and profit from extraordinary alternative investment opportunities.
And without a doubt, the most heavily publicized of alternative asset investments lately is none other than Bitcoin, the cryptocurrency that seems to set new price records each day. Bitcoin has zoomed upwards from about $1,000 to over $18,000 per Bitcoin this year alone, and who knows if and when the party will stop.
But as it turns out, it’s not so easy to own Bitcoin in your IRA or 401k. At least, not directly. There is at least one company that is aggressively marketing a solution that does this, but frankly, the fact that they charge a whopping, exorbitant, almost sickeningly high fee of 15% of your capital makes that a fundamentally poor choice.
Fortunately, that’s not the only choice any longer, as Bitcoin FUTURES have arrived. And that’s where we’ll focus during today’s episode – episode #292 – and I welcome you to participate in today’s show by telephone at (833) SDI-TALK, by email using the address feedback@SDITalk.com, or best of all, on today’s show page at SDITalk.com/292.
Ok, Bitcoin futures. This is an exciting topic for a lot of reasons. But let’s begin with the basics.
What is a “future” or “futures contract” as it’s more formally called? Originally, futures contracts were a way for farmers and commodity producers to be able to sell their products in advance. For example, a corn farmer might be 3 months away from having this year’s crop of corn ready for sale, and he wants to lock in a sale price at today’s prices. So he might sell a futures contract to, for example, a food manufacturer right now for delivery in 3 months. Everybody gets what they want: The farmer gets to lock in a price he likes, and the food manufacturer gets a firm commitment that they’ll have stock in 3 months when they need it.
So futures are really actually very simple, conceptually. It’s just an agreement where one party agrees to pay a certain price, and another party agrees to deliver a commodity on a certain date in the future. Easy-peasy.
Bitcoin futures work the same way. If you buy a Bitcoin future today for, say, $18,000 which expires in 3 months, what you’re doing is betting that Bitcoin will be worth more than $18,000 3 months from now. If it is, you get paid the difference in cash. If it isn’t, you lose the difference in cash.
See… not so complicated, is it?
You can think of Bitcoin futures as a way of being able to invest in Bitcoin without actually having to go through the trouble of setting up a bitcoin wallet or choosing an exchange or understanding any of the techie details of buying and owning a cryptocurrency.
And let’s be honest… some of those techie details are pretty complex. That’s why that one company that actually charges the unthinkable price of 15% of your investment has been able to get away with such one-sided pricing until now… there’s been no other good way.
Bitcoin futures change that. There are a number of brokers who are providing access to Bitcoin futures at this time, and more will follow… including more who will allow trading of those futures within an IRA.
Bitcoin futures trading is conceptually far simpler than direct ownership of Bitcoin, particularly for IRA’s. But there’s much more than just the simplicity that makes Bitcoin futures a superior vehicle for Bitcoin investing versus direct ownership.
One of those points of superiority is that every contract is traded and cleared through one of two major derivatives exchanges here in the United States, either the Chicago Board Options Exchange or the Chicago Mercantile Exchange. That means that your contracts will be paid, period.
Another point of superiority for futures over direct Bitcoin ownership is security. For all of the talk about cryptography and security and multi-key authentication, the fact remains that there have been some really serious security disasters with cryptocurrencies ranging from hacker attacks to the failure of entire exchanges to glitch flash-crashes causing massive stop-loss selling and margin losses that never should have happened.
While anything is possible, that sort of stuff isn’t likely to happen with US exchange-traded futures. The futures markets in America have existed for a very long time and are very mature. For example, the Chicago Butter & Egg Board – the predecessor to the Chicago Mercantile Exchange – opened in 1898 and has well over a century of operating history behind it. There’s not a lot they haven’t already seen… totally UNLIKE the Bitcoin marketplace.
Another nice advantage for the futures market is that, eventually (and probably very soon) it will be possible to SHORT SELL bitcoin futures. I won’t go too deep into that right now other than to say that if you believe Bitcoin is a bubble and will crash hard – as many people do – then short selling Bitcoin futures will make it possible for you to directly profit from the FALL of Bitcoin prices as well.
It’s not all roses, though. Futures are inherently short-term instruments, so if you want to maintain a position, you’ll have to swap expiring contracts for newer ones. But that’s very simple to do… just requires a call to your broker.
Bottom line? I suspect in the future it will be easier to buy Bitcoin directly within IRA’s and 401k’s, and that will be a good thing. But the security risks and fundamental immaturity of the bitcoin market will likely remain a relevant concern for a long time to come. Why not invest in Bitcoin in a way that gives you all of the profit potential but eliminates those fundamental risks?
That’s exactly what Bitcoin futures can do for you.
My friends, invest wisely today and live well forever!
Links & Resources
- Bitcoin Price History
- Chicago Board Options Exchange – Bitcoin Futures
- Chicago Mercantile Exchange – Bitcoin Futures
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