Whether you’re a speculator or a pure gambler, it makes sense to hedge your bet. Don’t put all of your chips on the table at once.
When it comes to Bitcoin, in most cases, you’re betting that the cryptocurrency will go up indefinitely. That’s the nature of a bubble when speculators dominate.
But what if you had a chance to protect yourself on the downside? You can do it with derivatives, contracts that may pay you if the price of something goes down (and up).
For example, the CME Group, which runs one of the largest derivatives exchanges offers futures contracts on the reference price of Bitcoin.
A futures contract is an agreement that’s linked to a price on a specified date in the future. Let’s say you think Bitcoin is going to hit $20,000 by a certain date.
You could buy a contract with that “strike price.” If Bitcoin hits that target, you make money. If not, you lose what you paid for the contract. You could also hedge if the price goes down.
“The new contract will be cash-settled, based on the CME CF Bitcoin Reference Rate (BRR) which serves as a once-a-day reference rate of the U.S. dollar price of bitcoin,” the CME said in a press release. “Bitcoin futures will be listed on and subject to the rules of CME.”
Note the CME’s mention of “rules.” That means the exchange is careful about tracking what it calls the “reference” price of Bitcoin and making price disclosure transparent. The exchange is also providing free historical price data, so you can see how volatile the cryptopcurrency has been.
Although the blockchain technology behind Bitcoin isn’t exactly transparent — only a few people know exactly how it works or how it originated — getting an exchange to track the price is a positive development. It means an independent body will be watching how the price is set. While this is no substitute for real regulation, it’s a good first step.
The CME is also monitoring a “spot” price for Bitcoin, which is what the cryptocurrency is worth at any given moment.
Although nearly any investor can get into trouble with derivatives — they can be caught too long or too short and lose a lot of money — it’s essential that you have a way to protect yourself if the market crashes.
Keep in mind as with any investment, portfolio diversification is a good move. Don’t load up on Bitcoin or any other cryptocurrency. It should comprise no more than 10% of your portfolio.