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Bitcoin futures hoped to kickstart market
Managing cryptocurrency risk is key to ensuring
the involvement of institutional investors. And
central to this is the ability to short the currency.
While there are over 150 exchanges worldwide
which allow trading, only one of these— Led-
gerX—currently offers derivatives. The announce-
ment by several exchanges earlier this year of
bitcoin future launches—including the CME, the
Chicago Board Options Exchange (CBOE) and
Nasdaq—represents the first steps by traditional
institutions to take a serious look at crypto-
currency. The CME is confident this will offer
institutional investors a way into the market.
“While historically the bitcoin marketplace
has been driven by retail customer participation,
recent trends have shown growing institutional
interest and we expect a futures contract on a
regulated exchange is attractive to digital asset
traders and hedgers because it offers the ability
to hedge or short their spot bitcoin positions,”
says Tim McCourt, product head for bitcoin
futures at the CME.
Having a way to hedge or short is particularly
apposite right now given the seemingly bubble
market valuations of bitcoin and ethereum. But
launching a bitcoin future is not straightfor-
ward and potentially burdened with significant
risk. Participants have expressed worries that
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TheTrade
Winter 2017
margining bitcoin futures will be impossible and
that large price moves in the underlying could
destabilise investor positions and therefore the
exchange itself.
Given these heightened risks, the new bitcoin
futures are pulling out all the risk stops. The CME
says it is implementing a variety of risk manage-
ment tools such as higher margin levels, position
and price limits and credit controls to appro-
priately manage the risk of listing and clearing
the futures. Then it also has circuit breakers in
place to curb excessive price movements— in
this case there will be up and down moves of
7% and 13%, and no bitcoin futures trading will
be permitted at prices 20% above or below the
prior day’s settlement. And combating cyber
crime means that the exchange will have a full
cash settlement system set against an exchange
for the product—there will be no bitcoin held on
exchange. Certainly this is the kind of move that
investors welcome.
“Futures markets are validation of any product
and increase the scope for new entrants with dif-
ferent views,” “We have used some futures and
this might increase when the CME comes online.”
However many derivative products have come
and gone in history. Whether these kickstart an
institutional market in bitcoin is another matter.