Bitcoin futures valuation. Non-financial variables to consider

AutorSofia Ruiz-Campo/Javier Rivas Compains/Victoria E. Sanchez Garcia
Cargo del AutorEae Business School/Eae Business School/Eae Business School
Eae Business School
Eae Business School
Eae Business School
Talking about the asset called Bitcoin is almost a philosophical ques-
tion. To introduce the concept, one should start by explaining other re-
lated terms, such as cryptocurrency.
A cryptocurrency might be defined (following Houben and Snyers
(2018)) as a broad array of technological developments that utilize a
technique better known as cryptography. At the same time, cryptog-
raphy is a technique of protecting information by transforming it (i.e.,
encrypting it) into an unreadable format that can only be decrypted by
someone who possesses a secret key. Many cryptocurrencies are decen-
tralized systems based on Blockchain technology, which is a distributed
ledger enforced by a disparate network of computers. A defining feature
of a cryptocurrency is that it has not been issued by any central authority,
rendering it theoretically immune to government interference or manip-
ulation. Distributed ledgers are divided into two broad classes (Tre-
leaven et al., 2017): those that seek to minimize the roles of trusted and
identifiable third parties; and those that explicitly rely on identifiable
third parties for some subset of the system's properties. Not all distrib-
uted ledgers are blockchains, but all blockchains are distributed ledgers.
The first blockchain-based cryptocurrency was Bitcoin. Bitcoins are
defined as digital coins that can be sent through the Internet and are
considered the first decentralized digital currency.
Yermack (2015) asserted that Bitcoin may not be considered as a cur-
rency since it performs poorly as a unit of account and as a store of
value. The high volatility of Bitcoin spot prices and the range of prices
quoted on various Bitcoin exchanges were seen to damage Bitcoin’s
usefulness as a unit of account. If the introduction of Bitcoin futures
and the ability to trade these futures would have resulted in a reduction
in the variance of Bitcoin prices or facilitated hedging strategies, that
could have mitigated pricing risk in the spot market. In that case, it is
possible that the Bitcoin could have acted as a unit of account, moving
it closer to being a currency.
We know that Bitcoin, and other digital assets, are considered as highly
volatile investments. Therefore, a way to obtain some benefits and to
reduce the cost of the investment might be investing in Bitcoin futures.
Futures trading offers the possibility of speculating about any direction
in the market, minimizing the risk (Hurst et al., 2010). Thanks to the
leverage effect, it is possible to invest the same amount of money than
in the spot exchange with a fewer number of contracts. Another contri-
bution of futures is offering the opportunity to hedge existing positions
straightforwardly (in both upward and downward market trends), al-
lowing the investor to easily adjust the risk of the portfolio to any mar-
ket environment.
Despite the enormous risk of this market, the use of cryptocurrencies
has been steadily increasing in recent years. Today, there are thousands
of alternate cryptocurrencies with unlike functions or specifications.
Some of these currencies are clones of Bitcoin, while others are forks
or new cryptocurrencies that split off from an already existing one. Ac-
cording to data from MARKET COIN CAP (2021), the capitalization
of the cryptomarket reached 3 Trillion dollars in October 2021, from
125 billion dollars in December 2018, an increase during 2021 of more
than 300%.

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