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CBOE Bitcoin Futures: How Will They Work and Can I Invest With Them?

Bitcoin has been the surprise big winner of 2017, with prices having soared higher as the cryptocurrency gains credibility among a broader set of users as a store of value. One thing that's prompted the latest rise for bitcoin is the rollout of bitcoin futures contracts, which CBOE Global Markets (NASDAQ: CBOE) plans to open for trading on Dec. 10. Other providers, including CME Group (NASDAQ: CME) and Nasdaq OMX Group (NASDAQ: NDAQ), are also considering bitcoin futures rollouts, with CME hoping for a Dec. 18 launch. But with CBOE looking like it will be first to cross the finish line, would-be bitcoin investors want to know what CBOE bitcoin futures will look like and whether they can use the futures contracts to take positions in the cryptocurrency. Here are the answers you need.

When will CBOE bitcoin futures begin trading?

The CBOE intends to launch bitcoin futures trading at 5 p.m. CST on Sunday, Dec. 10. It might seem strange to ordinary stock investors for a product to start trading on a Sunday afternoon, but the launch time accounts for the time difference between U.S. and Asian markets, allowing investors in Japan, China, and other Asia-Pacific countries to start using the futures contracts when they open for business Monday morning.

How much bitcoin will each futures contract cover?

The current contract specifications call for each CBOE bitcoin futures contract to cover a single bitcoin. That would have seemed like a small amount just a few months ago, but with prices having soared past the $10,000 mark, the decision seems smarter now.

Image source: Getty Images.

How will CBOE bitcoin futures work?

CBOE intends to list many different expirations of futures contracts for trading, including up to four weekly contracts a month into the future, three near-term monthly contracts up to three months into the future, and quarterly contracts at three-month intervals in March, June, September, and December.

The CBOE's futures contracts will be cash-settled, which means that no bitcoin will change hands. The final settlement value will be equal to the official auction price for bitcoin as determined by the Gemini Exchange, rounded to the nearest $0.01. In practical terms, what that means is that if the price of bitcoin goes up between the time you buy a futures contract and its final settlement, you'll receive cash equal to the rise in value. If it goes down, then you'll lose that amount of cash.

What margin requirements will CBOE bitcoin futures have?

Futures contracts require investors to put up an amount of money equal to a set percentage of the value of the underlying commodity as security for adverse price moves. This figure is known as margin. CBOE intends to set an initial margin requirement of 30% for bitcoin futures, but that number will be subject to change depending on contract price volatility once the futures contracts start trading.

Will there be circuit breakers on bitcoin futures trading if prices change dramatically?

Most futures contracts have limits on how much underlying prices can move within certain periods of time, and one major concern for bitcoin investors has been the volatility of its price. The CBOE has said that trading will halt for a 2-minute period if the contract price moves more than 10% in either direction from the previous day's settlement price. A 5-minute halt will apply in the event of a 20% move. These circuit breakers are shorter than what stock exchanges have imposed for large moves in major stock market benchmarks, reflecting the greater volatility of the bitcoin market.

What will ordinary trading hours be?

Regular trading hours will be from 8:30 a.m. to 3:15 p.m. CST Monday through Friday. Extended hours on weekdays run from 3:30 p.m. to 8:30 a.m. as well as from 5 p.m. Sunday afternoon through 8:30 a.m. on Monday morning. This will offer nearly continuous trading over a five-day workweek, with just a daily 15 minute break from Sunday at 5 p.m. to Friday at 3:15 p.m. CBOE bitcoin futures won't trade from Friday afternoon through Sunday afternoon.

Will I be able to trade bitcoin futures?

In order to buy or sell bitcoin futures contracts, you'll need to have a futures account with your broker. Brokers will make their own individual decisions about whether to allow customers to trade bitcoin futures, so you should check with your broker upfront to make sure that you'll be able to trade. Moreover, brokers can impose their own margin requirements above and beyond what the CBOE itself requires, so you'll want to ask questions about your broker's own policies when you consider using bitcoin futures.

What will it cost to trade?

CBOE is offering a promotional deal under which it will waive all of its transaction fees on bitcoin futures for the month of December. However, investors will still have to check with their futures brokers to learn about the commissions that they'll charge to trade bitcoin futures. After December, the CBOE fee schedule lists transaction fees of $0.25 to $0.50 per contract side, which brokers can choose to pass through to customers or incorporate into their own commission schedules.

Will bitcoin futures be successful?

Introducing futures contracts will bring bitcoin to a new level in the investing world. Futures will open the door to trading for those who don't want to deal with the challenges of owning actual bitcoin directly and who haven't been comfortable with various exchange-traded products that purport to offer bitcoin exposure. Moreover, it will offer a way for investors to bet against bitcoin's further price advance.

Not everyone is happy with the launch of bitcoin futures. Some financial institutions have argued that bitcoin futures pose a systemic risk, and they've asked the Commodity Futures Trading Commission not to let the CBOE and its peers begin offering futures contracts as currently proposed.

Notwithstanding objections from third parties, it's likely that CBOE bitcoin futures will launch as planned on Dec. 10. From there, those who follow bitcoin will watch closely to see how initial trading goes and what clues to the cryptocurrency's future they can glean from the way that buyers and sellers trade the new contracts.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Cboe Global Markets, CME Group, and Nasdaq. The Motley Fool has a disclosure policy.