Will Futures Trading in Bitcoin Kill the Rally…or Fuel It?
Bitcoin trading reached a major milestone this week—it is now part of the futures market. As of Sunday, December 10, the Cboe Global Markets became the first exchange to launch bitcoin futures, which allows traders to bet on the future price of the surging cryptocurrency. To be sure, a futures trade is a risky one – traders must bet on whether they think the price of bitcoin will go higher or lower, and by how much. Given how volatile the price of bitcoin has been—and how little fundamental drivers there are for rising or falling prices—the trader is basically betting into the unknown.
In fact, since the price of bitcoin is so volatile, Cboe traders of futures contracts in bitcoin will be required to have at least 44% of the bitcoin settlement price set aside as collateral for their bet, in the event that the price goes the other way. It’s normal for the trader to have to set aside some capital to make a futures trade, but normally it’s in the range of 10% of the settlement price. For futures traders in bitcoin, 44% of the settlement price could mean having a good crop of cash on the sidelines, since it’s been pretty much nothing but up in recent weeks for bitcoin. The price surged to $17,000 last Thursday.
The Cboe futures product will trade under the ticker XBT, and until the end of December, the Cboe will waive all transaction fees for bitcoin futures. If you’re an investor who thinks you want to buy a futures contract, you will generally have to go through your broker or hire one to make the trades. That can be a tough proposition since many brokers are waiting on the sidelines for now. TD Ameritrade, Charles Schwab, Fidelity, and eTrade (which are all discount brokers) are holding off on allowing clients to participate. Ally Financial, however, is allowing clients to buy.
As far as the big investment banks are concerned, JPMorgan and Citigroup—who are two of the biggest players in futures markets—did not participate in the Cboe futures market for bitcoin on Sunday, and the CEO of JPMorgan, Jaime Dimon, has reportedly referred to bitcoin as a “hoax.” Goldman Sachs settled some futures trades for their clients, however.
The opening of Cboe’s futures market for bitcoin, if anything else, will open the door to big banks and exchanges recognizing bitcoin as a legitimate trading asset and having more market participants trading in it, which may very well serve to reduce the volatility over time. As far as whether the futures market will lead to more price surging in bitcoin or perhaps result in a major correction, there is really no way to know. But markets tend to be made more efficient the more traders are allowed to participate, which is what Cboe’s futures market for bitcoin allows for.
Contributor
Sergey Savastiouk, Ph.D. has a degree in Applied Mathematics from Moscow University and has extensive experience as an entrepreneur, investor, manager, and mathematician. His professional expertise is in applied mathematics, mathematical modeling, system and pattern analysis, and software and hardware system integration. He has served as the CEO of several hi-tech start-up companies and nonprofit organizations, which has given him proven capabilities in business strategy for high-tech start-up companies, market assessment, company formation, team building, product development, marketing, and sales. He has published numerous articles in journals and magazines on related fields. As a retail investor, he spent 15 years developing his proprietary trading and quantitative algorithms (now Tickeron’s A.I.), which brought him significant returns in trading the stock market. His current work and goal in founding Tickeron is to bring professional, sophisticated stock market analysis capabilities to retail investors via an easy-to-use interface.
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