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Institutional Investors are Swapping Bitcoin Futures for Physical BTC in Wall Street

It seems like the institutional investors at Wallstreet have also succumbed to FOMO that is related to the current Bitcoin (BTC) rally. The King of Crypto has been increasing steadily from Friday, July 13th, when it was valued at $6,200,. BTC has since gained by 34.4% to current levels of $8,335.

This impressive rally in almost 2 weeks, is the reason two Wallstreet institutional investors have completed the first-ever exchange of their positions in the CME’s Bitcoin futures market, for an equivalent amount of the ‘physical’ Bitcoin asset in an EFP transaction. According to CCN.com, the CME EFP Bitcoin transaction was facilitated by  E.D & F Man Capital Markets, which is a registered futures commission merchant, and itBit, an institutional-grade cryptocurrency exchange.

According to the CME Group website, EFPs are defined as follows:

An Exchange for Physical (EFP) is a particular type of Exchange for Related Position (EFRP) transaction and may be executed in any CME equity index future in accordance with Rule 538 and any associated advisories.

The EFPs are then used by traders as follows:

EFP transactions allow investors to convert between futures and either ETFs or baskets of the underlying index constituent stocks, without exposure to intraday market execution. This not only allows investors to optimize their holdings to meet their leverage, capital, tax and liquidity needs but to also differentiate between the tool they use for trading and how they want to hold their exposure.

In an EFP transaction, two parties exchange equivalent but offsetting positions in an equity index futures contract and an underlying physical equity (either a related ETF or basket of shares). One party is the buyer of futures and the seller of the physical shares, and the other party takes the opposite position. The EFP is a privately-negotiated transaction between the two parties to the trade, where the consummated transaction must be reported to the Exchange.

These transactions are common in traditional trading, but this is the first time an EFP has been used with a digital currency as the underlying asset. The current expiration date of the CME Bitcoin futures is this Friday, the 27th of July. The EFP transaction might have been as a result of the investors seeing that BTC is on a rally rather than on a decline as earlier expected.

Brooks Dudley, from E.D & F Man Capital Markets Inc., had this to say about the trade:

Every day we facilitate EFPs for our clients in physical assets such as soybeans, wheat and treasuries. EFPs on CME Bitcoin futures mark an important step forward in the maturity of the regulated derivatives market for digital currencies.

As the cryptocurrency markets continue to evolve, EFP trades might become common. Owing to the fact that the U.S. Commodity Futures Trading Commission (CFTC) has only approved Bitcoin futures products that are settled using cash, the EFPs will provide more flexibility as to how Wallstreet interacts with digital assets.

Disclaimer: This article is not meant to give financial advice. It is an opinion piece. The opinion herein should be taken as is. Please carry out your own research before investing in any of the numerous cryptocurrencies available.

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Is August 10th D-Day for the Bitcoin ETFs Filed by the CBOE at the SEC?

In an online article only 2 days ago, it was mentioned that August 10th is when the SEC will decide on the fate of the filing of Bitcoin ETFs done by the CBOE exchange. The article was quoted as saying:

Bitcoin ETF fate is finally going to be decided on August 10. Currently, SEC is asking for comments on the listing and trading of Bitcoin ETF introduced by VanEck SolidX Bitcoin Trust that will be catering to only accredited investors.

However, this date has been disputed as being the proverbial D-Day for the decision on the Bitcoin ETFs by the American SEC. The date of August 10th was apparently calculated using an SEC statement that says that a decision will be reached on each filing no less than 45 days from the date of publication in the Federal Register.

Wording from the notice indicates that:

Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding.(ii) as to which the Exchange consents, the Commission will: (a) By order approve or disapprove such proposed rule change, or (b) institute proceedings to determine whether the proposed rule change should be disapproved.

The notice was dated June 26th but published on July 2nd. The August 10th date was reached by adding 45 days to the June 26th date. Therefore, there is high chance that we might have to wait a bit longer than August 10th given the statement highlighted above from the published notice.

So what can we do till then?

Continue sending comments to the SEC as earlier mentioned in the following ways:

Please note that the file number for the BTC ETFs on the SEC website is SR-CboeBZX-2018-040.

  • Online form
  • Comments can be submitted via this link
  • Look for SR-CboeBZX-2018-040
  • There should be a Submit comments section
  • Email
  • Send comments to [email protected].
  • The subject line of your message must include the File Number for the rule. This is the number that begins “S7-” or “SR-”.
  • If you attach a document, indicate the format or software used (e.g., PDF, Word Perfect, MS Word, ASCII text, etc.) to create the attachment. Please note that the SEC now accepts comment letters in PDF format. DO NOT submit attachments as HTML, GIF, TIFF, PIF, ZIP, or EXE
  • Using the traditional ‘Snail Mail’

    Send 3 copies of your paper comment letter to:

    Brent Fields, Secretary
    Securities and Exchange Commission
    100 F Street, NE
    Washington, DC 20549-0609

    Each copy must list the “File Number” for the rule. This is the number that begins “S7-” or “SR-”.

Disclaimer: This article is not meant to give financial advice. It is an opinion piece. The opinion herein should be taken as is. Please carry out your own research before investing in any of the numerous cryptocurrencies available.

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CME Group Partners to Launch Ether Reference Rate Index

Derivatives exchange operator CME Group is launching an ether reference rate and a real-time ether-dollar index in partnership with UK-based digital asset trading service Crypto Facilities.

The operator noted Monday that it would provide “a daily benchmark price in U.S. dollars” every 24 hours, as well as the real-time price “based on transactions and order book activity” from cryptocurrency exchanges Kraken and Bitstamp, according to a press release. The rates are already available online on both the CME Group and Crypto Facilities websites, and will be provided to the CME Group Market Data Platform starting June 4.

In a statement, CME Group managing director and global head of equity products and alternative investments Tim McCourt said “the Ether Reference Rate and Real Time Index are designed to meet the evolving needs of this marketplace. Providing price transparency and a credible price reference source is a key development for users of ethereum.”

Similarly, Crypto Facilities CEO Timo Schlaefer said:

“Ether, the second largest cryptocurrency, experienced incredible adoption and growth in 2017, evolving into the leading blockchain for smart contracts. We are excited to be contributing to the strong community that has developed around the Ethereum network by providing a reliable reference rate and real-time Ether-Dollar price.”

The new indices will be overseen by the Bitcoin Oversight Committee formed by CME Group, Crypto Facilities and other industry participants, according to the release. This “oversight committee will regularly review the methodology, practices and standards to protect the integrity of the reference rates.”

The news comes just days after Crypto Facilities began trading in ethereum futures, as previously reported by CoinDesk. The platform announced it was launching the first futures contract for the token through a regulated platform on May 11.

Crypto Facilities notably provides CME Group with reference rates for the latter’s own bitcoin futures.

Ethereum image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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CME to Patent System for Seamless Blockchain Rule Changes

CME Group may be looking at ways for developers to modify a blockchain’s rules without requiring consensus from all of the network’s nodes, new patent filings show.

It’s a key need for such systems, such as those that form part of airline reward points programs and other applications in which a blockchain is used to store and maintain information in real time, the application’s authors write. The filing was published last Thursday by the U.S. Patent and Trademark Office (USPTO), having been submitted in December 2016.

CME cites airline frequent flyer programs as one example of where this system would be needed. If an airline chooses to store its frequent flyer customer data on a public blockchain, it would need to have a process in place to change the rules governing the blockchain in case the airline changes the rules or another aspect of the frequent flyer program itself.

The application notes that while public blockchains are important for cryptocurrencies, their difficult-to-change nature makes them less than ideal for some private and commercial uses.

The application explains:

“One example of a rule change is if the airline wants to increase transaction fees to transfer airline miles between parties. If the airline uses an open blockchain protocol like Bitcoin, where anyone may act as a node or miner, the increase in transaction fees would have to be approved by the blockchain users. The rule change would require virtually every node and miner to update their software before the rule change could take effect. Otherwise, a fork … may occur.”

The filing represents the latest blockchain-related intellectual property bid for the derivatives giant. Indeed, CME’s past patent filings suggest how the company might look to use the tech to store and manage transaction data in connection with trading venues.

Disclosure: CME Group is an investor in Digital Currency Group, CoinDesk’s parent company.

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The leader in blockchain news, CoinDesk is an independent media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. Have breaking news or a story tip to send to our journalists? Contact us at news@coindesk.com.

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Editable Blockchains? Mining Futures? 2017 Saw Crypto Patents Pile Up

The past 12 months have seen a range of patent applications focused on cryptocurrency or blockchain applications, including some from notable firms such as banking giant Bank of America and credit scoring giant FICO.

In sum, the flow of patent filings witnessed in the last year demonstrates that some of these major businesses are seriously weighing how the tech could change how they operate – or, at the very least, serve as a basis for new intellectual property.

Below, we look at some of the more notable (and proposed) uses of the technology from the past year, from the controversial rewriteable blockchain to a proposed system for exchanging cryptocurrencies from Bank of America.

BofA Exchange?

It was perhaps an unexpected patent award from one of the top banks in the U.S.

Released earlier this month and tracing back to 2014, Bank of America’s proposed cryptocurrency exchange patent would, if fully realized, let users exchange a government-issued currency into a cryptocurrency. From there, as detailed by the filing, the user could then move into another crypto of their choosing.

The exchange would use three distinct accounts to act as temporary stores for each type of currency, with the first holding the user’s fiat, the second holding one type of cryptocurrency and the third holding the other one.

While it’s clear that Bank of America is unlikely to be launching its own crypto-exchange anytime soon, the filing and subsequent award from this year nonetheless illustrate the kinds of applications being looked at within the financial sphere.

In a hypothetical future in which cryptocurrencies are used widely, the idea of walking down to your local bank branch to move from one digital money to another may not be so far-fetched.

The ‘Editable Blockchain’

Accenture secured a patent this year for an editable blockchain, a concept celebrated by some and sharply critiqued by others.

The idea is that permissioned parties to a distributed ledger could, under certain conditions, alter the data that’s been added in the event that it has been altered or is subject to fraud. Proponents say that it allows a critical degree of control that would, if called upon, be used to essentially keep the books clean from unfriendly parties and their transactions.

Yet critics deemed the idea controversial, stating that the concept flies in the face of bitcoin’s essentially open-door policy, in which any party can download a load, broadcast transactions and add their data to the blockchain.

Ultimately, the editable blockchain patent perhaps illustrates the varying perspectives seen in the industry today – as well as the different ways in which the technology could be used and modified by participants in the space.

FICO watchdog

Is one of the biggest credit monitors getting into the bitcoin game?

That was one of the prevailing questions stoked by a patent application from FICO published in September. It outlined a method for detecting “illegal” cryptocurrency transactions, boasting a method for determining whether they are either fraudulent or part of a money laundering scheme.

The patent notably explained that the system would collect data from bitcoin exchanges, using that data to develop a “threat score” for each transaction. Transactions with higher threat scores would be flagged, allowing them to be reviewed before tracking them to their destination.

While it’s not clear if FICO has begun tracking bitcoin exchange data, the filing showed that major financial firms outside of banks, brokerages and investment firms are exploring how the tech might impact them – and the kinds of functions they may serve in a possible future of wholly digital currencies and assets.

ATMchain?

china unionpay

One of the year’s more notable filings came from China UnionPay, the payment card and ATM giant.

As illustrated by documents from the State Intellectual Property Office – the Chinese counterpart to the U.S. Patent and Trademark Office – China UnionPay is looking at how it might connect its ATM networks via a blockchain.

At its heart, the proposed system would use blockchain as a kind of global clock, leveraging it to synchronize the ATMs and the mass amounts of data they process.

The company has not yet stated whether it is actively pursuing blockchain to connect its ATMs, but China UnionPay noted in its application that the security provided by the tech could solve a major problem its network faces.

Currency Trading

Is the “father of financial future” getting into crypto?

Such a potential was raised in a patent filing for a hardware device that enables cryptocurrency trading, given that one of its listed inventors – economist Richard Sandor – is credited as having pioneered the financial product in the 1970s. Sandor is a former Chicago Board of Trade chief economist and vice president.

The device described would tie digital currencies to derivatives contracts, ensuring security by placing the registry in a repository that is not publicly accessible. However, the registry would function as a mechanism for delivering the cryptocurrency.

Sandor’s involvement was a notable aspect back when the filing was first made public. However, recent regulatory developments in the U.S. have perhaps brought the proposed invention back to the fore.

Less than two weeks ago, the CFTC released its proposed definition of what constitutes a “physical delivery” of a cryptocurrency. While that definition is still subject to public comment and possible alteration, the agency is moving closer to a formal policy after months of wrangling.

As a result, proposed inventions like this one (or something similar) could play a key role in helping exchanges provide “physical” delivery of something that is entirely digital.

Derivatives Mining

CME, exchange

CME Group launched its first bitcoin futures contracts on Dec. 18 – and a filing from earlier this year suggests that it could create products aimed at specific parts of the cryptocurrency ecosystem.

Mining is an energy-intensive process by which new transactions are added to a blockchain, which also results in the minting of new coins as a reward. Put more simply, miners burn a lot of power to run their machines in a bid to – hopefully – add a block or two a day at the very least.

Yet the unpredictability of mining – variance and luck do have an impact – has attracted CME, which, as illustrated by its patent filing from April – outlined a way for miners to hedge some of their risks through derivatives.

Miners could hedge their bets by guaranteeing a payout if the network’s hash rate grows more quickly than expected (thus increasing the difficulty of finding a new block).

If the miners do make what is expected, or the hash rate grows more slowly than planned for, the contract would then expire. While the miners would not receive any money from it, they would be able to generate more profits through the mining process than originally planned.

Disclosure: CME Group is an investor in Digital Currency Group, CoinDesk’s parent company. 

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The leader in blockchain news, CoinDesk is an independent media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. Interested in offering your expertise or insights to our reporting? Contact us at news@coindesk.com.

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Bitcoin Futures Codes: How to Read Them And What They Mean

Lanre Sarumi is the CEO of Level Trading Field, an interactive online platform for professionals in the finance industry.


When you read you begin with A, B, C.

When you sing you begin with Do, Re, Mi.

When you trade futures you begin with F, G, H, J, K, M, N, Q, U, V, X, Z.

Each of those letters represents the month of the year that the contract expires. Remember, with a futures contract, two counterparties agreed on a fixed price and date to trade an asset. The month of that date is represented by those letters.

I don’t know who came up with that nomenclature or how. Just memorize it and move on. Although I’m sure there is going to be some know-it-all in the comment section saying “I know!, I know!”

The products traded on the exchange also have product codes. Heating oil is RB, crude oil is CL and the bitcoin futures set to trade on the CME starting Dec. 18 will be BTC. On the CBOE, which introduced its bitcoin futures contract Sunday, the bitcoin product code is XBT.

If you want to trade the Jan. 2018 bitcoin contract, then, you will be trading BTCF8. BTC again represents bitcoin futures, “F” is the January code, “8” represents the year, 2018. If you want to trade the February 2018 BTC contract you trade BTCG8.

Pop quiz

What if you want to trade the Nov. 2017 BTC contract, what would it be called?

If you said BTCX7, you would be correct, but it’s a trick question. We are in December 2017. The November contract, if it had existed, would have long expired by now. That brings up a very important point: If you have an open position in a physical delivery contract, you are subject to delivery.

If, for instance, you are long the gasoline contract, you may want to notify your neighbors that 42,000 gallons of Reformulated Gasoline Blendstock for Oxygen Blending may be rolling up anytime soon.

In the case of CME and the CBOE Bitcoin futures, however, the contract is cash settled. What this means is on the final day of the contract, the buyer is paid the difference between the value of the futures contract and the settlement price if the settlement price is higher than the value of the futures contract. If the value of the futures contract is greater than the settlement price, the seller is paid the difference. In dollars, not bitcoin.

What happens if you want to hold on to your futures position after the futures contract expires? If you are long the contract you can simply sell it and buy the contract for the next month. This sounds simpler than it is in practice. Remember the market is constantly moving on all contracts. If you don’t mind paying a significant cost to do so then it really is a simple process. If you do, then you probably want the two-step process to happen simultaneously.

The process of selling or buying a futures contract and then simultaneously doing the opposite (buying or selling) another contract that expires later, is called spreading. Since the only difference between the two futures contracts is the expiration date, it is specifically called calendar spreading. If, after the process, you end up with opposite positions in two contracts, then you own a calendar spread.

Futures traders do a lot of spreading. Some do it for the reason described above, rolling an existing position into another month. Others do it to trade the price difference between two months.

If, for instance you know that a hard fork in the bitcoin blockchain is coming in March 2018 and you believe as a result of the fork, the March contract will be more valuable than the February 2018 contract, you can simultaneously sell the February contract and buy the March contract. You make money if your thesis is true and you can effectively do the trade as simultaneously as possible.

Some traders can pull this off successfully at very little cost, others successfully at very high cost. The definition of success for the latter group is an indulgence in generosity. The first group are usually high-frequency traders with fast computers.

The second group are folks not to0 dissimilar from the ones reading this article.

One and done

The futures exchanges, in the never-ending quest to help, and of course make a chunk of cash helping, have simplified the process.

You can buy or sell calendar spreads as a single contract. The exchange takes on the task of performing the process as one operation, so the trader is guaranteed to get the two positions at the same time. These are called exchange-traded calendar spreads. If you did the two-step process yourself, you end up with the same thing, but you executed a synthetic calendar spread.

Remember the exchange codes? Exchange calendar spreads wanted to join the party, so they were given their own names. The February/March calendar spread for bitcoin is at the CME is BTCG8-BTCH8. In other words, the February 2018 contract “minus” the March 2018 contract.

Essentially, the exchange calendar spreads are always long the first month and short the second month. If your goal was to sell the February contract and buy the March contract (your hard fork thesis), then you simply sell the BTCG8-BTCH8 exchange calendar spread.

If you are new to futures trading that is probably a lot to process. There is still a little more to learn before you print out your “Certified Futures Trader” certificate. In the next few articles, I’ll talk a little more about butterfly spreads, condors, box spreads andinter-commodity spreads.

After that, can you print out your “certified futures trader” certificate? Nope. You still have to learn about implied prices and how they affect the spreads.

After that, can you print your certificate? Nope, you still have to learn about price banding, price limits, contract size, and tick price.

After that you still have to learn about …. wait, where are you going?

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The leader in blockchain news, CoinDesk strives to offer an open platform for dialogue and discussion on all things blockchain by encouraging contributed articles. As such, the opinions expressed in this article are the author’s own and do not necessarily reflect the view of CoinDesk.

For more details on how you can submit an opinion or analysis article, view our Editorial Collaboration Guide or email news@coindesk.com.

Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Please conduct your own thorough research before investing in any cryptocurrency.

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Understanding Futures: A Primer for Bitcoiners

Lanre Sarumi is the CEO of Level Trading Field, an interactive online platform for professionals in the finance industry.


“Study the past if you would define the future.” – Confucius

Confucius shares a trait with Satoshi Nakamoto: no one knows if their most famous work was authored by one or multiple people.

Regardless of who came up with the quote above, it is sage advice and so to understand what the introduction of bitcoin futures on the Chicago exchanges means for the cryptocurrency, let’s start with history.

Before there were “futures” contracts there were “forward” contracts. Before there were forward contracts, there were gentlemen’s agreements. Before there were gentlemen’s agreements there was simply “show up in the market with your harvest and hope you can sell everything at your desired price.”

All four of the above still exist today. The “show up at the market with your harvest and hope you can sell everything at your desired price” is self-explanatory. The other side of the trade is “show up at the market hoping a merchant is there to sell you what you want at the price you want it.”

The problem with conducting business this way, besides the mouthful of words, is that you risk not finding a desirable counterparty and thus losing money. To fix this problem, the gentleman’s agreement was created.

In the gentleman’s agreement, two counterparties agree on a time, place and price in the future to trade with each other. The problem with the gentleman’s agreement was that it required two gentlemen willing to honor the agreement.

The absence of one or more of the required gentlemen usually led to lawsuits.

However, the courts usually threw out the cases because it was hard to convince a judge that you had a binding agreement with just a selfie of you and your counterparty shaking hands. (OK, they probably didn’t call them “selfies” back then, but you get the idea.) To solve this problem the forward contract was created.

The forward contract is a legally binding agreement between two counterparties to trade a given asset at a future (forward) date and a given price. It allows one party to seek relief from the court if the other party does not live up to their part in the agreement. While showing up with a nicely typed and signed document is a lot better than a selfie of two people smiling in better times, it has one problem. The defaulting party could be broke. Since broke parties generally do not pay their debt, the other party essentially loses.

To fix this problem, the futures contract was developed.

Futures 101

The futures contract is pretty much the same as the forward contract with some slight differences. The main difference is that an exchange stands as a guarantor to both counterparties.

The bitcoin futures contract set to launch Dec. 18 at the CME is a cash-settled contract. This simply means that on the date of expiry, no actual bitcoin will be traded but a cash value will be credited to one of the parties depending on the final settlement price.

If the contract was first traded at $12,000 and the price of the CME bitcoin index goes to $14,000, the seller is on the hook for $2,000. Should the seller decide to flee and not fulfill his or her obligation, the exchange will step in and make the buyer whole.

Goodbye, going to court with legal contracts or selfies. Goodbye, getting on your donkey and hulling bushels to the harvest market. Ok, you use Uber instead of a donkey and you traded bitcoins instead of corn, but you get my point.

Before you start thanking the exchanges for their selfless service and asking how many ETH tokens you can send them in appreciation of their kindness, here is the thing: they get paid.

Toll booth city

In ice cold fiat cash, no cryptos here.

They call it an “exchange fee.” That is expected of course, but here is another thing, the exchanges don’t really take all the risk of defaults.

They have other entities called “futures clearing merchants” that shoulder a good portion of the risk. For their service, clearing merchants also take a fee. They call it, you guessed it, a “clearing fee.”

Exchanges must be regulated. After all, they are now essentially the counterparty to every transaction and could, in fact, default themselves.

In the U.S., they are regulated by the Commodities Futures Trading Commission (CFTC) and not the Securities and Exchange Commission (SEC), despite the word “Exchange” in the latter’s name. Why these agencies of government are separate is probably a good subject for an article, just not this one.

But here is an interesting thing. The CFTC is the regulatory body for futures exchanges, but it essentially outsourced a lot of the work to a self-regulatory association established by the exchanges, The National Futures Association. Like most people, the folks at the NFA don’t work for free. By now you know what is coming… they get a fee.

In the case of Bitcoin futures, the CFTC has washed its hands very clean and is leaning on the exchanges and NFA to self-certify and self-regulate the Bitcoin futures market.

Remember when I said the exchanges don’t take all the risks and they have the clearing firms shoulder some of the risks? Well, the clearing firms are no fools, they also pass on some of the risk to firms called introducing brokers. Introducing brokers, of course, collect a “brokerage fee.”

A short leash

Now if you think brokers are the last fool, then think again. There is one last party in this chain, the trader, you.

Yes, did you think because you pay exchange fees + clearing fees + NFA fees + brokerage fee you would be let off the hook? Hahaha, ROFTL, give me a moment let me gather myself.

I’m back. You see, when the exchanges said they would stand as guarantor to both sides, what they really meant was they would ask their friends at the clearing organization (sometimes a subsidiary of the exchange, not to be confused with the clearing merchants) to put their hands in both counterparties’ pockets every day to make sure they don’t abscond when the market goes against them.

You may be able to trade the bitcoin cash market anonymously, but you cannot do the same with futures.

So, if two counterparties trade a Bitcoin futures contract for $12,000, the clearing organization will calculate the value of the contract every day using a price they call “settlement price.” For the CME, the settlement price is determined from an index, the Bitcoin Reference Rate (BRR). The BRR is calculated using the market prices from certain exchanges.

As of today, there are four exchanges in the CME index, Bitstamp, GDAX, Kraken and itBit. The Cboe, which launched bitcoin futures trading Sunday, uses the price from the Gemini exchange. If the settlement price is $11,900, after the first day, the clearing organization takes $100 from the buyer and gives to the seller. If the settlement was instead $12,100, the opposite happens: The clearing organization takes $100 from the seller and gives it to the buyer.

This mark to market process is performed every trading day.

By so doing, the exchange essentially protects both sides, and itself, from having to deal with massive losses that can accrue over days. The clearing organizations don’t really interact directly with most traders except the self-clearing firms. They perform the “hand in pocket” routine with clearing merchants. Long before the clearing organization takes money from the clearing merchants’ pockets, the clearing merchant would have notified the broker and the trader who must have made a deposit with the clearing firm.

Table stakes

How much deposit is required? The exchanges, CME to be specific, created this magical tool to measure the intraday volatility of every commodity futures contract. It’s called SPAN, short for standard portfolio analysis of risk.

SPAN does some intensive computation not unlike the computer from “The Hitchhikers’ Guide to the Galaxy,” Deep Thought.

Just like Deep Thought, SPAN spits out a magical number, but in this case that number isn’t 42. In fact, it’s different for every contract. The number is used by a lot of brokerage firms to determine how much of the risk the trader will shoulder. They call it initial margin. This is the amount a trader must deposit before he can trade a given contract.

In the case of a brand new contract like the bitcoin futures contract, where SPAN has no historical futures data to calculate the margin number, the exchanges go back to their “Deep Thought” computer for a number. For CME, Deep Thought says initial margin should be 35%. Cboe’s computer says 30%.

So that’s it right? Not really.

Focus on the first word of the term “initial margin.” The margin you deposit is just to “initially” get you started. If you immediately start making money from your trade because you followed the secret to trading, “buy low, sell high” then you are fine.

If your strategy doesn’t follow that simple concept and the value of the futures contract you bought or sold causes the initial margin to fall below a certain value called the “maintenance margin,” then you will be getting a call to post additional funds into your account. If you fail to do so, then the broker, clearing firm, or exchange will close out your position and whatever is left in your account will be used to offset your losses.

The above is essentially a high-level synopsis of the futures market as well as an introduction to how account management and setup work. The process is the same whether the account is set up to trade oil, wheat or bitcoin. I will be posting additional articles on futures contracts in general and bitcoin futures contracts in particular.

Market miniature image via Shutterstock

The leader in blockchain news, CoinDesk strives to offer an open platform for dialogue and discussion on all things blockchain by encouraging contributed articles. As such, the opinions expressed in this article are the author’s own and do not necessarily reflect the view of CoinDesk.

For more details on how you can submit an opinion or analysis article, view our Editorial Collaboration Guide or email news@coindesk.com.

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Bitcoin Futures Launch Could Rekindle Push for ETF, CBOE Says

A new era kicks off today with the listing of the first bitcoin futures contract on the Chicago Board Options Exchange (CBOE.

When trading begins at 5 p.m. U.S. central time on the world’s largest options and futures exchange, investors will be able to bet on – or against – bitcoin without actually buying or selling it.

A sign of maturity for the cryptocurrency ecosystem at large, the contract listing is just one of several such milestones this year, including the expected launch next week of a bitcoin futures contract from CME Group.

What’s more, it could also revive another effort to bring liquidity and mainstream respectability to the cryptocurrency – namely, the development of a bitcoin exchange-traded fund (ETF).

In an interview, Edward Tilly, Cboe’s chief executive officer, said the exchange may use information gleaned from futures trading to make a case to the Securities and Exchange Commission (SEC) to allow bitcoin-linked ETFs and exchange-traded notes (ETNs).

“All of that information goes into building the next steps,” Tilly told CoinDesk, adding:

“One of those potential next steps would be moving into ETFs and ETNs that would take SEC approval.”

Round two

Talk about a bitcoin ETF by the chief executive of Cboe is notable for two reasons.

The first is money. In this year’s bull market, global ETF assets have climbed to $5.3 trillion in October from $4.8 trillion at the end of last year.

ETFs are tradable securities tied to an index, commodity or basket of assets, and are available for purchase by retail investors. Bitcoin ETFs could conceivably be an appealing option for individuals enticed by the asset’s price gains, but put off by the hassles and risks of storing and safeguarding it.

But secondly, and perhaps more importantly to the nascent crypto asset industry, this would not be the first stab at a bitcoin ETF.

Earlier this year, the SEC rejected a proposed ETF by Gemini, the bitcoin exchange founded by Cameron and Tyler Winklevoss (which also has a multi-year license from Cboe to provide bitcoin data in the futures launched today). Among other concerns, the regulator cited the lack of other regulated bitcoin products.

Now that a number of bitcoin futures – which are regulated by the Commodity Futures Trading Commission – are live and in the works, that could all change.

In the wake of an earlier effort by a Cboe subsidiary to convince the SEC to reconsider its decision, Tilly said his company will be evaluating data about the settlement process, liquidity, and volatility spikes of the bitcoin futures for possible conversations with the SEC. 

In any event, the exchange wants to do more with its new data partner.

“This isn’t the end, but rather the beginning of the story of our relationship with Gemini,” said Tilly. “We hold that relationship very dear.” (Gemini did not respond to emails seeking comment.)

Beyond bitcoin

Regardless of whether the SEC proves amenable to re-opening conversations about a bitcoin ETF, there are other business opportunities, according to Tilly.

Following the launch of the bitcoin futures contract, Cboe will take what Tilly called a “measured approach” to initiating other contracts, as it has done after similar launches.

The next step is to study the data from the bitcoin futures contract as part of the build-up to what Tilly says could eventually turn into a derivatives offering on the futures contract itself.

“It’s not a month or two” away, he said. “But at some point derivatives on bitcoin will make sense.”

Additional business opportunities “down the road,” according to Tilly, include the addition of contracts on other cryptocurrencies. As he put it:

“While this is our first foray into bitcoin, it is not to the exclusion of other currency going forward. The relationship with Gemini allows for any of the digital currencies that we think will will meet listing criteria as we learn more from our first launch with bitcoin.”

Cboe image via Shutterstock.

The leader in blockchain news, CoinDesk is an independent media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. Interested in offering your expertise or insights to our reporting? Contact us at news@coindesk.com.

Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Please conduct your own thorough research before investing in any cryptocurrency.

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Futures Industry Association Blasts New Bitcoin Derivatives

Days after CME Group and the CBOE announced their bitcoin futures contracts launch dates, U.S. clearinghouses are expressing concerns over how these products were developed.

In an open letter to the Commodity Futures Trading Commission (CFTC), Futures Industry Association (FIA) chief executive Walt Lukken said members of the organization are worried about their exposure to bitcoin’s price swings as a result of these contracts. The group boasts more than 15,000 members and counts some of Wall Street’s biggest institutions among its ranks.

“The recent volatility in these markets has underscored the importance of setting these levels and processes appropriately and conservatively,” Lukken wrote.

Members of the FIA guarantee customers’ trades and contribute to guarantee funds set up to cover instances where a company is unable to pay out its contracts.

In the letter, Lukken said FIA members are concerned that they will have to pay for any outstanding contracts caused by price changes in bitcoin, rather than the groups which are actually selling the futures products.

He wrote:

“A public discussion should have been had on whether a separate guarantee fund for this product was appropriate or whether exchanges put additional capital in front of the clearing member guarantee fund.”

Lukken continued to note that, while CME and CBOE technically followed legal procedures detailing self-certified contracts, they should have taken a more extended approach due to bitcoin futures not being a standard product.

A public discussion would have allowed FIA members to conduct tests of their own in anticipation of insuring these contracts, he argued.

“We remain apprehensive with the lack of transparency and regulation of the underlying reference products on which these futures contracts are based,” he wrote, also asking whether the companies offering the products can protect their customers from “manipulation, fraud, and operational risk.”

Disclosure: CME Group is an investor in Digital Currency Group, CoinDesk’s parent company. 

CBOE image via Shutterstock

The leader in blockchain news, CoinDesk is an independent media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. Have breaking news or a story tip to send to our journalists? Contact us at news@coindesk.com.

Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Please conduct your own thorough research before investing in any cryptocurrency.

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Bitcoin Futures: Make Way for a New Kind of Whale

Lanre Sarumi is the CEO of Level Trading Field, an interactive online platform for professionals in the finance industry.


For bitcoin traders, all eyes should be on Dec. 10 and Dec. 18.

That’s when former self-styled bitcoin whales will be swallowed up like plankton as the CBOE and CME Group launch bitcoin futures contracts for the first time in history.

Over the next few days, I will be providing information on trading in the bitcoin futures market. My goal is to shed some light on its peculiarities and hopefully help people avoid mistakes. To start, it won’t just be the whales that will be devoured, but any other smaller crustaceans that choose to ignore the potential impact a derivatives market can have on an underlying commodity.

You see, in bitcoin’s cash market, where these whales exist, they swim amongst other bitcoin marine lives without necessarily attacking their co-habitants. The reason is simple. Everyone in bitcoin’s cash market is financially incentivized to keep the price of bitcoin high.

Sure, the market sometimes takes a dip, but that’s because some bitcoin holders are taking profits off the table. In the futures market, there is as much reward for the creatures on the downside as well as the upside. Tremendous wealth can be created in a falling market as it can be in a rising market. There are incentives on either side.

Essentially, bitcoin’s cash market is like a river. Its flow is dependent on constants and so it generally flows in one direction. The bitcoin futures market, on the other hand, is like an ocean with thermohaline circulation: its flow is dependent on several variables.

Marine life in the futures market is not as friendly. The waters are infested with killer whales. Apex predators that feed on other whales. They even feed on themselves.

Alright, enough of the marine analogy…

Changing tides

Journey through any of the bitcoin forums on Slack, Reddit and Telegram, and there is general happiness and optimism about the value of bitcoin with the advent of a futures market.

This is born from a lack of understanding of how futures markets work.

There is this misguided perception that the futures markets work in a similar fashion to the cash market. In fact, both markets are diametrically opposite.

Cash markets (e.g. stock exchanges and bitcoin exchanges) are primarily populated with optimists. Futures markets, on the other hand, are primarily populated with pessimists.

Put another way, cash markets were created for investors, while futures market were created to hedge against risk. Investors go to the cash markets because they believe the value of the assets will rise. Hedgers go to the futures market because they don’t want the price of the asset to move against them. You can’t “sell” in the cash markets if you don’t already own the underlying asset. Even the short sellers borrow those assets from owners before shorting.

The futures market has no such constraint. You can sell whether you own the underlying asset or not. A corn farmer sells futures contract because he is afraid the price may fall and wants to guarantee a price for his corn when he eventually harvests it.

A manufacturer that uses corn buys a futures contract because he is afraid the price of corn will rise and wants to cap the price he pays for corn.

Both buyers and sellers in their own way are pessimistic.

Uncharted waters

In the corn futures market, the farmer and the manufacturer are natural hedgers on opposite sides of the market. Thus, they create some sort of equilibrium.

Of course, market makers and speculators are required to create additional liquidity, but they, for the most part, rely on the existence of the true hedgers.

In the bitcoin futures market, the only groups that need to hedge are the miners and current bitcoin holders. Miners will sell futures contracts to guarantee they get at least the given price for the bitcoins they plan to mine in the future. Bitcoin owners will do the same to hedge their downside.

There are no natural hedgers on the buy side. This will inadvertently create pressure on the downside.

The only group left to keep the price steady and maybe even cause the price to rise is the group of speculators. Unlike the miners and bitcoin holders, the speculators will comprise of both bulls and bears. For the most part, we have seen the power of the bulls in the cash market, but until the introduction of the futures market, we had not seen the power of the bears.

Could the bears overwhelm the bulls? Vice versa? No one knows. Is the introduction of futures going to lead to an increase in bitcoin price? No one knows.

What is clear though is if you currently hold enough bitcoin to be classified a whale, you better familiarize yourself with the futures market. Simply drifting in the ocean hoping for the best is not a strategy. Well, it is a strategy, just not a very good one.

Disclosure: CME Group is an investor in Digital Currency Group, of which CoinDesk is a subsidiary.

Shipwreck image via Shutterstock

The leader in blockchain news, CoinDesk is an independent media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. Have breaking news or a story tip to send to our journalists? Contact us at news@coindesk.com.

Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Please conduct your own thorough research before investing in any cryptocurrency.