Bitcoin Futures May Be Coming But Trading Hurdles Remain
October 31 2017 - 2:04PM
Dow Jones News
By Gunjan Banerji
Traders wary of the nascent cryptocurrency market got some
welcome news Tuesday: CME Group announced plans to launch bitcoin
futures.
But longtime participants of derivatives markets say starting up
a healthy, thriving market for cryptocurrency futures or options
could be complicated. They point to issues like how to value
bitcoin derivatives and whether there will be enough traders who
can consistently post prices.
Futures are derivatives contracts that investors and companies
typically use to speculate on prices or hedge risk against turns in
the market. Other major markets like stocks, bonds, commodities and
currencies all have derivatives based on them.
For trading of virtual currency futures to be a robust market,
several things have to happen first, said Julian Hammar, an
attorney who focuses on derivatives at Morrison & Foerster.
Many futures contracts struggle to gain traction. "They get
listed but they just don't kick off," Mr. Hammar said. "You have to
hit a sweet spot in terms of having that commercial need and
sufficient price volatility, as well as interest by
speculators."
Bitcoins are attractive to traders because of their lack of
correlation with other markets, as well as their wild swing, which
have been absent from assets like stocks for years. But
transferring this dynamic to a nascent market like cryptocurrencies
could pose challenges.
Analysts and traders point to several hurdles. There needs to be
plenty of market makers -- traders willing to post price quotes
throughout the trading day -- to ensure liquidity, the crucial
ability to do trades without significantly moving prices. A liquid
market helps an investor buy or sell a future or option without
prices for the contracts moving significantly.
Derivatives veterans also raise questions such as how to price
futures or options of digital currencies. Bitcoin is also traded on
multiple exchanges around the world. Prices for the cryptocurrency
are often inconsistent across different venues, and pricing
derivatives based on them could also be problematic, they say.
Cboe Global Markets Inc.,which announced plans in August to
launch bitcoin futures, joined with Gemini Trust Company LLC to
help solve the pricing issue. They will run a daily bitcoin
auction, which will run a settlement process at the end of each
trading day to determine a set price.
Cboe declined to comment on CME's announcement about bitcoin
futures.
Over the last two decades, Cboe found success launching futures
on its marquee volatility Index, or VIX, and now there is an
ecosystem of contracts on it spanning VIX futures, options on VIX
futures, a slew of exchange-traded products and then options on
those as well.
Futures contracts could be used as the building blocks for
exchange-traded funds, which would make it easier for both
institutional and retail investors to buy and sell virtual
currencies.
Cboe is "pursuing some of the same features that we learned were
important for our derivatives product with the VIX," said John
Deters, chief strategy officer at Cboe. Re-creating that for
cryptocurrencies "depends on a lot of different bricks in the
foundation," he said.
The exchange giant isn't the only one vying for a position in
the cryptocurrency derivatives business. Bitcoin options exchange
LedgerX launched in October after winning approval to clear bitcoin
options from the Commodity Futures Trading Commission. The venue,
backed by options exchange operator Miami International Holdings,
Inc., is focusing on institutional investors for its digital
currency swaps.
More than $2 million in notional value have changed hands since
trading on LedgerX started, said a spokeswoman for the
exchange.
That U.S. exchange giant CME is getting into bitcoins could draw
traders, especially since equity markets have been so quiet this
year. Derivatives traders and investors rely on big price
fluctuations to capture profits.
By contrast, regulatory developments like China's crackdown on
bitcoins and comments from finance leaders like J.P. Morgan Chief
Executive James Dimon have caused sentiment toward cryptocurrencies
to shift quickly this year, causing bitcoin prices to post enormous
swings.
"It's been a tough year," said Josh Fabian, an Illinois-based
retail trader. "The lack of volatility has been really
challenging."
On bitcoin derivatives, he said "I'm interested in trading them
for sure."
Write to Gunjan Banerji at Gunjan.Banerji@wsj.com
(END) Dow Jones Newswires
October 31, 2017 14:49 ET (18:49 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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