Why I don't trade bitcoin and you shouldn't either
Don't trade bitcoin on these online stock exchanges, its risky, not liquid and there is no depth.
Here I outline the dangers of trading bitcoin online vs on the new CBOE Bitcoin Futures contract.
Today the CBOE has opened their Bitcoin Futures to trading. This is a great thing since it provides legitimate counterparties, tons of liquidity and leverage for traders to speculate on the price of bitcoin asset class.
And if you have not been trading the bitcoin on the Coinbase or other exchanges it may be a right time to start. This is why I haven't been trading bitcoin so far.
First of all, CBOE is a huge marketplace, where 100's of billion of dollars exchange hands every single day. This is great for bitcoin since CBOE provides rules and regulations which subject the counterparties to risk mitigation. So if you buy 100 bitcoin futures then there is a guarantee that this contract is yours and when the time comes the counterparty will have the money to pay you. If you don't know futures contracts expire every months, or few months. If you compare that to the current online exchanges, you literally have no idea who your counterparty is and if they've got the financial backing to pay you. Of course, it's different if you outright buy the coins, however you'll be required to put up the full price without leverage.
The second point is leverage. CBOE Bitcoin Futures provide leverage. So to trade 1 unit/contract of Bitcoin would only require you to put up 4,000 dollars if the price of bitcoin is 20,000. Of course, when the contract expires you'll need to put up a full notional amount, however, most traders will roll it out to the next month and not worry about it. Leverage is a great thing, since retail traders can participate in the markets without worrying about putting up 100's of thousands of dollars, and this is why Bitcoin Futures are a great product.
Another point is liquidity of the product. If you look at Apple stock when it's trading, the Bid and the Ask price is within 1 penny. That's because different counterparties are competing for your order and the markets get tighter and tighter. Which is great for consumer, since to enter and exit a trade is fast and it doesn't cost you much, depending on liquidity of the product (damn those high frequency traders, always out to get a buck - sarcasm). You always want to trade products that are liquid and popular, so that you won't loose out on stupid fees between a bid and the ask. And right now the Bitcoin Futures traded today only 3000 contracts comparing to Apple's stock of 35 million contracts. So yeah, I would not touch it now with a 10 foot pole.
Overall, having Bitcoin Futures is a great thing and a step in the right direction, which provides retail trades with solid counterparty, tight markets and ability to avoid the unknowns of online exchanges (MtGox anyone?). Although now liquid yet, the bitcoin futures is another asset class that can have a huge potential. I'm personally waiting for the derivatives market on bitcoin futures, since the volatility is so high and selling premium is going to be the $$$ maker on bitcoin.
Sorry about the audio - will fix it soon.
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