Are we allowed to talk about Bitcoin?

Since they began offering the futures late last year, I've dabbled a bit in it (and yes, I look at it as a commodity or an asset, not as a currency. ... although anything can be a currency if you can get widespread acceptance of it).

The great thing about the futures markets are that the products are highly leveraged. It's also the thing that wipes out 95 percent of people who mess with futures. There are two futures contracts for bitcoin: /xbt, which is offered by CBOT (the Chicago Board of Trade) and /btc which is offered by the CME (Chicago Mercantile Exchange).

/btc is the more leveraged of the two, and the more widely traded. /xbt is basically a one for one proposition. Each contract is for one bitcoin (although you need just a fraction of the price of a bitcoin to trade each contract). Each /btc contract is for 5 bitcoins. Both of the bitcoin contracts are much less leveraged that many other futures contracts, mostly because the exchanges were afraid that it was going to attract dumb money that doesn't understand leverage, and they'd have a mess on their hands. And it has to an extent.

You can trade each of the contracts with just a fraction of their notional value. For example, let's say you are trading /btc (the more active of the two contracts) and the price of bitcoin is 6500 (around what it is right now). The notional value one futures contract is $32,500. But the margin required (working off the top of my head, so I may be a bit off) is only 40 percent of that -- so all you need is between $10,000 and $15,000 per contract to effectively speculate on the prices of 5 bitcoins. That creates a ton of opportunity. .. It also sets up conditions by which if there is a huge price move, you can get wiped out quickly. I think a lot of that money has been flushed from the market over the past few months.

I have traded /btc quite a bit since it was introduced late year. It's not the focus of what I do, but it has been too tasty to resist. It's relatively thinly traded compared to the actual currency futures, which creates a set of challenges. But near as I can tell you have a bifurcated market of people who have no clue what they are doing (and don't understand how dangerous leverage can be). ... and smart money, which has been feasting on those futures. There has been some very serious up/down momentum as the price of bitcoin ran up and then got hammered back down. I am not a momentum trader (for the most part). So that isn't something I am interested in. But within those moves, it has mostly followed a very predictable swing trading pattern -- until recently, at least. And that has worked very well for me. I think it has mostly been because the smart money in that market was toying with the inexperienced players who can't recognize those tried-and-true traps. All markets function that way to an extent. But in its early life, bitcoin has followed a particularly regular pattern of moves over a 2 to 3 day stretch, designed to suck in people (while the smart money is exiting and reversing their trades just as the last person chasing is getting in).