Authored by Vittoria Onufrio
After the announcement of the coming start dates for Bitcoin futures, its price has been climbing and last week almost touched $20,000 on some exchanges. Then Bitcoin retreated and climbed again after Bitcoin Futures started to trade yesterday at the CBOE.
The introduction of bitcoin futures has been welcomed with great enthusiasm, especially because it may open the door to Institutional investors that will bring liquidity as well as growing stability in a volatile market.
Also, in my opinion, the introduction of Bitcoin futures may boost the confidence of some of the investors that have been reluctant in embracing the bitcoin revolution because they are uncomfortable in trading in the less familiar and unregulated bitcoin exchanges characterized by frequent outages. The introduction of bitcoin futures may be attractive for these investors since they will have the opportunity to trade in the more familiar and regulated exchanges such as the CME and CBOE that offer price discovery and higher transparency.
Even if the introduction of Bitcoin futures has been welcomed by many investors, it also raises some concerns in the industry. For instance, Thomas Peterffy, the Chairman of Interactive Broker, expressed his concerns about the launch of Bitcoin futures, considering the underlying market not mature enough to support such as product. He also warned about the dangerous impact of bitcoins extreme volatility that potentially may destabilize a clearing organization in case of a large cryptocurrency move.
Precautions were taken in order to contain the swing and unexpected spike of Bitcoin. For instance, CME contracts have price fluctuations limits of 7%, 13% and 20% that applies above or below the prior day’s Bitcoin futures settlement price.
CBOE Bitcoin futures contracts do not have price limits. However, CBOE imposes trading limits to reduce or contain volatility, halting trading for two minutes, if prices rise 10% above or fall 10% below the daily settlement price of that contract on the prior Business Day, and for five-minute if price rise 20% above or fall 20% below the daily settlement price of that contract on the prior Business Day.
CME is also setting the margin to $19,761.68 and the CBOE is setting the margin to $6,866.64. Some clearing firms are already implementing a higher margin requirement and are setting a maximum number of contracts per account. Furthermore, not all the clearing firms seem willing to offer Bitcoin futures at least in this first phase. They prefer to wait and see how it will play out.
The high margin required by both exchanges will leave out the smaller investors that will likely continue to trade bitcoins in one of the many unregulated bitcoin exchanges.
Bitcoin futures looks, in the beginning, a product reserved to institutional and larger investors that will certainly apply greater cautions and very conservative money management techniques to approach this product. I suspect that for this reason, the liquidity will not be as expected at least at the very beginning. However, in the longer run, their presence will be very beneficial since eventually they will increase the liquidity, decrease the volatility and adding some stability to the Bitcoin futures market.
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