Most of the world’s Bitcoin and cryptocurrency trading transactions occur across more than 170 exchanges located worldwide. These exchanges allow traders and investors to speculate on Bitcoin In hopes of price appreciation.
Bitcoin has surged by more than 1,725% in 2017, starting out at just above $800 per Bitcoin to levels that are threatening to approach $18,000 per Bitcoin as at the time of writing. Much of this price movement surprisingly came in the last three months, especially after China’s ban on Bitcoin trading and ICOs nearly halved the value of Bitcoin in October 2017. Suddenly at around $3,500 per Bitcoin, prices looked tempting and those who got in at that price have more than quadrupled their money.
Bitcoin is certainly one of the more significant talking points of the year as far as financial assets are concerned. It has surpassed even the stellar rise of the Dow Jones Industrial average in 2017. And while Bitcoin seems to be the most popular crypto for retail traders, other cryptocurrencies such as Ripple, Ethereum, Litecoin, and MinCoin are quietly raking in returns that have even surpassed those of Bitcoin. The biggest surprise is that all this has quietly happened without much participation from the institutional investors, who have traditionally held the market share in terms of trade volumes and whose trades are responsible for most of the big market moves in more traditional assets classes such as stocks.
Why Bitcoin Futures Trading?
The boom in cryptocurrency trading has led to the rapid emergence of several cryptocurrency investment vehicles, all of which are gaining serious traction in the markets:
– Cryptocurrency exchange trading (highest volume)
– Initial Coin Offerings (ICOs)
– Crypto Hedge Funds
– Crypto-based Investment Funds (largely unregulated).
The issue with most of the channels through which Bitcoin and other cryptocurrencies are being traded is that most of them are unregulated. Many experts have a cautious view of the cryptocurrency markets and the finanacial services companies and exchanges that power the sector. For example, when you take a closer look at the major cryptocurrency exchanges, there are only two online exchanges which are domiciled and built specifically to support trading in a manner that is consistent with the standards and rules of American financial markets. GDAX and Gemini are operated by companies that are regulated by the financial market regulators in the US. All other exchanges are not regulated by the Commodities and Futures Trading Commission (CFTC).
Where there is an abundance of exchanges scattered all over the world, there are bound to be some issues, one of which is the large and random distribution of prices across these trading platforms. Other problems include the following:
1. Transactional inefficiency
2. Large price differentials
3. Illiquidity
4. Constantly changing spreads
Why do these problems exist? They exist because supply and demand dynamics are greatly imbalanced. In the week Robert Mugabe was unseated as Zimbabwe’s President, Bitcoin was trading at $14,000 per BTC whereas the average price across numerous exchanges was half that price.
Apart from price imbalance and market inefficiency, there is also the issue of safety and security of cryptocurrencies and fiat currencies lodged in these offshore exchanges. Most of the world’s cryptocurrency trading is being conducted in exchanges that are located outside of the United States. These are areas where US financial regulators have very little enforcement reach. What happens when there is a major hack of an exchange? This is a major cause for concern. In 2014, 650,000 Bitcoins were stolen after the largest Bitcoin exchange at the time (Mt.Gox) was hacked in 2014. In fact to date, no Mt.Gox trader or investor has recovered any money or cryptocurrency holding lost in the security breach.
Since the Mt.Gox debacle, there have been several other high profile hacks of exchanges, ICO wallets and mining portals.
So the establishment of Bitcoin futures trading on regulated US exchanges is a step that will take care of some of the concerns that currently exist when it comes to speculative trading on Bitcoin. With the approval of Bitcoin futures trading given by the CFTC to the CME Group (Chicago Mercantile Exchange or CME) and CBOE Holdings (Chicago Board of Options Exchange or CBOE), Bitcoin futures trading will commence in December 2017. Trading commenced on the CBOE on December 11, while that of the CME will go live on Dec. 18.
The commencement of Bitcoin futures trading on the CBOE and CME will impact the market in the following ways:
a) Discount brokerages offering cryptocurrencies on a regulated basis may be the next market evolution. Recall that stock trading was the exclusive business of brokerages that only attended to those with megabucks on the trading floors, until Charles Schwab, E*Trade and TD Ameritrade came on board with their discounted brokerage services that charged very low fees and let retail traders through the door.
b) The market will be better structured and will operate with a standardized legal framework which protects investors. In other words, some sanity will be brought to the markets and effective protections can be put in place for the benefit of investors and traders. The mess that the Mt.Gox saga has become will not be the fate of Bitcoin futures investors.
c) Better regulation means that the cryptocurrency markets will be preserved for true traders and genuine investors and not be a safe haven for dirty money. There is a lot of evidence to show that the bad guys (drug gangs, illicit pharmaceuticals dealers, terrorists and hate groups) already have funds in Bitcoin exchanges all over the world. Only recently, a Pakistani-born resident of New York was charged with wiring over $85,000 she was accused of obtaining fraudulently from a bank to opaque entities suspected to be representatives of the Islamic State. From the US to Australia, more and more of these “dirty Bitcoins” are being discovered and seized. Having Bitcoin traded as futures on exchanges will mean that the identities of whoever comes to the market to buy or sell will be thoroughly scrutinized. The UK is spearheading moves for stricter Know Your Customer (KYC) protocols for cryptocurrency exchanges.
d) The institutional investors will be attracted into the market, bringing with them the liquidity, volume and algorithms that have worked well for them in other markets.
e) Jobs will be created. Programmers, content providers, digital markets, dealers and traders will be employed by the blossoming industry. Expansion of this market will also attract talent from other markets as well.
Bitcoin Futures Trading on CBOE: The Journey So Far
The CBOE Futures Exchange (CFE) commenced the trading of Bitcoin futures on December 11, 2017. This marked the first time that any US exchange had offered Bitcoin futures for sale. The official ticker symbol for the Bitcoin futures contracts is “XBT”.
Pricing of XBT futures is based on the auction price at the Gemini Trust Company’s digital asset exchange, and all contracts are cash-settled in U.S. dollars. Trading of Bitcoin futures allows traders to gain exposure to price movements in Bitcoin without actual ownership of the cryptocurrency. Investors can buy, sell and trade bitcoin futures or hedge their exposures.
All XBT futures contracts settle to a single tradable auction price. This allows for effective hedging of any underlying Bitcoin holdings using strategies that the traders are already familiar with.
Contract Specification for XBT Bitcoin Futures on CBOE
• Contract Name: CBOE Bitcoin (USD) Futures
• Description: CBOE cash-settled (US Dollars) Bitcoin futures. Pricing based on Gemini auction prices.
• Contract Multiplier: 1 bitcoin.
• Ticker Symbol: XBT
• Final Settlement Value Symbol – XBTS
• Contract Expirations:
– 4 weekly expirations (“weekly” contracts)
– 3 near-term serial months
– 3 months on the March quarterly” contracts.
• Trading Hours:
– Regular trading from 8.30am to 3:15pm Monday to Friday
– Extended trading from 5pm to 8.30am (Monday) & 3.30pm of previous day to 8.30am (Tuesday to Friday). All times in EST.
• Trading Platform: CBOE Command
• Minimum Price Intervals: 10.00 points USD/XBT (equal to $10.00 per contract). Further increments of 0.01 points USD/XBT (equal to $0.01 per contract).
• Termination of Trading: Trading hours for expiring XBT futures contracts end at 2:45 p.m. Chicago time on the Final Settlement Date.
• Final Settlement Date: The Final Settlement Date for “weekly” XBT futures is two business days prior to the Friday of the week denoted by the ticker symbol. The Final Settlement Date for “serial” and “quarterly” XBT futures is two business days prior to the third Friday of the month denoted by the ticker symbol.
So how has the first week of Bitcoin trading been? Here are the highlights.
– Volatility seems to have calmed. The price swings of Bitcoin have not been as wild in the first CBOE trading week as it had been in the three weeks prior to the listing.
– Spreads between the cash and futures contracts have narrowed from over 5% to just above 1.5%. This is not surprising as improved liquidity leads to lower spreads.
– Volumes have been a bit underwhelming, given that estimated trading volume of Bitcoin trades worldwide averaged $8.5billion. Daily trading volumes of the Bitcoin futures contracts on the CBOE have not exceeded $60 million. Though at first glance the disparity in the figures seems inexplicable, they are actually not a surprise. Most of today’s Bitcoin exchange trading occurs outside the US.
Contract Specifications for CME Bitcoin Futures
As the CME prepares to commence Bitcoin futures trading, here are the proposed contract specifications for the CME Bitcoin futures.
Contract Unit: 5 Bitcoins
Price Quotation: USD per BTC
Trading Hours
CME Globex:
Sunday – Friday 6:00 p.m. – 5:00 p.m. (5:00 p.m. – 4:00 p.m. CT) with a 60-minute break each day beginning at 5:00 p.m. (4:00 p.m. CT)
CME ClearPort:
Sunday – Friday 6:00 p.m. – 5:00 p.m. (5:00 p.m. – 4:00 p.m. CT) with a 60-minute break each day beginning at 5:00 p.m. (4:00 p.m. CT)
Minimum Price Fluctuation
$5.00 per Bitcoin = $25.00(i.e. $5 X 5 Bitcoin)
Product Code
CME Globex: BTC
CME ClearPort: BTC
Clearing: BTC
Listed Contracts
Monthly contracts listed for the nearest 2 months in the March quarterly cycle (Mar, Jun, Sep, Dec) plus the nearest 2 serial months not in the March quarterly cycle.
Settlement Method
Cash Settled
Termination Of Trading
Trading terminates at 4:00 p.m. London time on the last Friday of the contract month. If that day is not a business day in both the UK and the US, trading terminates on the preceding day that is a business day for both the UK and the US.
Conclusion
Bitcoin futures will allow major institutional players, hedge funds, and retail traders to gain exposure to BTC. These futures will allow for global price discovery of this new asset class. Eventually more major banks and brokerages will begin to formally participate in the global cryptocurrency markets. In fact, the famous discount broker TD Ameritrade just announced they will introduce the trading of Bitcoin futures on their online trading platform. The launch of the online trading of Bitcoin futures by TD Ameritrade is to coincide with the official launch of CME’s Bitcoin futures trading. This development will definitely enhance the liquidity and market participation at the retail end of the market. This also gives American traders more options of trading at regulated venues.
Presently, the Bitcoin futures trading market in the US is still in its infancy. The conditions to support the fast-paced trading seen in the forex markets are still not in place. However, this will change as more discount brokerages come into the market and when institutional firms get in as well. Increased institutional and retail participation will boost liquidity and enable traders who want to hedge their positions or quickly get in and out of trades to do so. Bitcoin futures are one way to get very leveraged long or short exposure to Bitcoin. Futures are extremely volatile and their prices change rapidly. Tremendous fortunes are made and lost every day in the global futures markets and these contracts offer unprecedented leverage. For those speculators that wish to make a massive directional bet on global cryptocurrency, a Futures contract is the perfect method. For those high risk speculators that wish to place large bets directly in the cryptocurrency markets, an alternative option is to purchase some of the extremely popular hot rare altcoins such as Litecoin (LTC) and MinCoin (MNC).
The CME group is the world’s undisputed largest derivatives market and handles futures contracts across many different asset classes, global indexes, and commodity products. The company has a market cap of over $400B and their various exchanges which include CME, CBOT, NYMEX, and COMEX handle over 1 Quadrillion dollars ($1,000,000,000,000,000) worth of contracts annually.
2018 will be a big year for cryptocurrency and altcoins and many predict that the big dogs including Goldman Sachs, Morgan Stanley and JPMorgan will enter into the Bitcoin market and bring with them the other institutional players.