CME says it has “no changes” in store for its bitcoin futures contract, following retrenchment by rival Cboe.
The possible launch of Ether futures could have both positive and negative ramifications for the cryptocurrency.
Less than a year after the launch of the first ever futures contracts for Bitcoin, Ethereum could be the second cryptocurrency to be traded on regulated futures exchanges.
It’s understood that the Chicago Board Options Exchange (CBOE), the same platform that launched Bitcoin futures in December 2017, is waiting for the green light from the Commodities Futures Trading Commission (CFTC) to launch Ethereum options by the end of 2018.
The CBOE will base its ETH contracts on the Gemini cryptocurrency exchange market — the base it already uses for its Bitcoin futures.
With the United States Securities and Exchange Commission (SEC) formally declaring that Ethereum was not classed as a security in June, the path ahead was seemingly paved for the prospective launch of ETH futures.
At the time, CBOE president Chris Concannon hailed the decision, saying ETH contracts had been a talking point since late 2017:
“We are pleased with the SEC’s decision to provide clarity with respect to current Ether transactions. This announcement clears a key stumbling block for Ether futures, the case for which we’ve been considering since we launched the first Bitcoin futures in December 2017.”
Just three months later, there are very real grumblings that this could come to fruition, much like the build up to the eventual launch of Bitcoin futures in 2017.
The CBOE has indicated to Cointelegraph that it is indeed looking at Ethereum futures, highlighting Concannon’s interview with Quarts in June, where he laid out their thoughts on the cryptocurrency and the possibility of a futures contract:
“Ether is one of the more highly liquid cryptocurrencies out there. Along with Bitcoin, the demand is much higher in Ether than any other cryptocurrency on the market. We’ll look at launching futures in the near term, but there’s a process we have to go through before even announcing such a launch. That process is something we’ve talked to the CFTC about at length and certainly want to take steps along that process and make sure everybody is comfortable with the next product we announce.”
According to Concannon, there is significant demand and appetite for Ether futures. Having successfully launched Bitcoin futures, the CBOE hopes to use that same product design and structure and apply it to any cryptocurrency futures that may be looked at in the future.
The CBOE wouldn’t divulge any more details at this point in time, saying the relevant information would be communicated in due time.
What could happen
While the finite details of when we can expect to see these Ether futures launched is yet to be revealed, the possibility of these new offerings had a neutral effect on different cryptocurrency values.
The price of ETH turned around from a slight slump on August 31, which could be attributed to these initial reports. The price of Bitcoin showed a similar movement pattern, with a strong uptick on the same day.
Crypto market 31.08.–01.09.2018. Source: coin360.io
In response to the first reports of the CBOE’s plans, Fundstrat’s co-founder Tom Lee told Business Insider that Ether futures would have an initial negative impact on the price of the cryptocurrency:
“Since December of this year, if one was bearish on any aspect of crypto but did not want to own the underlying, they could short BTC. They can now short Ethereum, [which] means the net short on BTC in futures would fall.”
Good or bad?
It is not easy to predict what any market will do, and this is especially true for cryptocurrencies. However, big moves like this by mainstream financial institutions seem to influence the price of cryptocurrencies.
Cointelegraph spoke to eToro senior market analyst Mati Greenspan to get an educated view on how the launch of Ether futures could potentially affect the price of the cryptocurrency.
Greenspan was upbeat about the possibility, saying that Wall Street is working hard to build bridges to the crypto market, calling the launch of Ether futures a critical next step.
While some people on social media cited concerns that aggressive shorting would hurt the value of Ether, Greenspan offered a counterargument to that point:
“The ability to go short is a critical component of price discovery. So this is ultimately a healthy thing for the market.”
Furthermore, Greenspan believes that an Ether futures contract will put the cryptocurrency in the spotlight, which could very well attract new investors with deep pockets. The eToro analyst also believes that it could have a knock-on effect for other cryptocurrencies:
“Crypto prices are correlated strongly with each other. So anything that’s good for Ethereum should be good for Bitcoin and vice versa. So far, the futures volumes on Bitcoin have been relatively small and insignificant to the rest of the market, but as interest from institutional investors changes, we should be seeing higher volumes and new ways to trade them.”
While Greenspan offers a far more optimistic prediction of things to come, there are those that have a more cautious view of the potential launch of Ether futures.
Phillip Nunn, CEO of Wealth Chain Capital, told Cointelegraph that there is potential for certain investors to short Ether, which could have some serious consequences for companies that have launched ICOs on the Ethereum blockchain.
Nunn likens the launch of BTC futures to the FX markets some 30 years ago, where futures markets had a big sway on markets:
“2018 has seen a massive shift in the behaviour of crypto mainly due to the advent of Bitcoin futures, the charts have been different and clearly there has been market manipulation and “whales” dominating the market either way. Someone is making a lot of money. It’s similar the the FX markets in the 80’s and 90’s where it was easy to influence markets via longs and shorts.”
Furthermore, Nunn sites the risk futures pose to companies that have raised money using ERC20 tokens:
“I worry for ETH on a couple of levels. Firstly it’s market cap is a lot smaller than Bitcoin and I think ETH futures could see it dipping under $150 maybe even $100. Add to that that 95% of ICO’s raise money with ERC20 tokens in ETH, if an ICO has raised say $20m dollars and holds in ETH, suddenly that halves and I think it will trigger sell offs by these companies to BTC or FIAT to protect their interests.”
A different outcome?
While the crypto futures trail has been blazed by Bitcoin, it may well be difficult to draw any early conclusions from the launch of BTC futures in December 2017.
Shortly after the CBOE and the Chicago Mercantile Exchange (CME) launched their respective futures offerings, Bitcoin reached its all-time high of just over $20,000, before a humbling correction left markets in the red and reeling for months.
While various factors played a role in the significant pull-back in the cryptocurrency markets, it made life difficult when it came to judging how BTC futures affected the markets and influenced prices.
In July, CME indicated that it would not launch any other cryptocurrency futures offerings. However, it did release data that showed BTC futures average daily volume had increased by 93 percent over the first quarter of 2018.
Considering the growth in the number of BTC futures contracts midway through 2018, it could be fair to assume that there is a growing appetite for these type of financial offerings in the cryptocurrency space.
Nevertheless, the possible launch of Ether futures will be a space that will be keenly monitored in the months to come. As Nunn summed up in his comments to Cointelegraph, price prediction in the crypto space have been as good as a shot in the dark:
“Of course I could be wrong and it could fly to $1000 but it seems the futures strategies serve to stifle the true growth of crypto, This has certainly been the case with Bitcoin as all price predictions are out of the window.”
BTC Could Rise As A Result of Ethereum Futures
Even in a market downturn, development in this nascent industry rages, with firms continually releasing innovative products and services that could change the future of crypto. And as reported by Ethereum World News previously, the CBOE, the foremost US-based options exchange, is just months away from launching Ether futures that will be based on Gemini markets.
This news immediately sparked speculation about the effect this vehicle would have on the market, with many optimists noting that this futures contract should help to propel the price, development, and maturation of Ethereum, and subsequently, the growth of this industry.
While many agreed with this hope, Tom Lee, the head of research at Fundstrat Global Advisors, expects this news to benefit the price of Bitcoin (BTC) more than the price of Ethereum (ETH).
Speaking with Business Insider reporters, Lee, who has become well-known, if not near-infamous for his seemingly undying bullish sentiment on Bitcoin, noted that Ether futures will allow speculators to weigh down on the price of ETH.
His claims seem to be corroborated by the historical price action of Bitcoin following the initial CBOE and CME futures release. Since Bitcoin futures debuted in mid-December of last year, prices tanked, with Bitcoin briefly touching $20,000 before tumbling to $7,200 as it stands today. Some think that this is no unfortunate coincidence, but rather, the effect of short sellers placing bets against Bitcoin via the futures market.
As such, the Fundstrat Bitcoin bull then noted that the same effect, albeit likely not as drastic, could occur this time around as well, with the planned December 2018 introduction of the CBOE-backed Ether futures contract potentially lining up with a substantial decline in the price of ETH.
On the other hand, however, Lee added that the introduction of Ether futures may alleviate some of the pain placed on Bitcoin by bears, as the short interest may translate from the BTC contract to the ETH contract. The Fundstrat executive elaborated, stating:
“Since December of this year, if one was bearish on any aspect of crypto but did not want to own the underlying, they could short BTC. They can now short eth, means the net short on BTC in futures would fall.”
Some skeptics of this theory pointed out that it is somewhat counterintuitive, but upon thinking about it further, it is clear that Tom Lee’s thought does hold some credence at the very least.
Ethereum has already had a bad year, so many are hoping that the eventual introduction of these futures will not hamper the price of the asset further. But for now, only time will tell what the short to mid-term fate of the second largest crypto asset will be.
At the time of writing, Ethereum is down 1.4% in the past 24 hours, as it currently sits at $294 after falling from yesterday’s highs at $303.
Photo by JESHOOTS.COM on Unsplash
The U.S. Securities and Exchange Commission (SEC) has rejected a total of nine applications to list and trade various Bitcoin (BTC) exchange-traded funds (ETFs) from three different applicants, according to a three separate orders published by the SEC today, August 22.
The disapprovals come one day ahead of the anticipated deadline, August 23, stipulated for a pair of BTC ETFs that had been submitted by ProShares in conjunction with the New York Stock Exchange (NYSE) ETF exchange NYSE Arca.
The SEC has now rejected a further seven proposed ETFs alongside the ProShares pair –– these being five further proposed ETFs from Direxion, also for listing on NYSE Arca –– and two proposals from GraniteShares, for listing on CBOE.
For all three disapprovals, the SEC has stated that:
“[T]he Commission is disapproving this proposed rule change because, as discussed below, the Exchange has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5), in particular the requirement that a national securities exchange’s rules be designed to prevent fraudulent and manipulative acts and practices.”
All three applications had proposed futures-based Bitcoin ETFs. The SEC has today reinforced its qualms over inadequate “resistance to price manipulation” in an insufficiently sized BTC derivatives market. In the case of ProShares’ two ETFs –– and repeated in the two other disapproval orders –– the SEC has stated that:
“Among other things, the Exchange has offered no record evidence to demonstrate that bitcoin futures markets are ‘markets of significant size.’ That failure is critical because, as explained below, the Exchange has failed to establish that other means to prevent fraudulent and manipulative acts and practices will be sufficient, and therefore surveillance-sharing with a regulated market of significant size related to bitcoin is necessary.”
As a March 2018 registration statement from the SEC noted, “the [ProShares] Funds do not intend to hold Bitcoin Futures Contracts through expiration, but instead intend to either close or ‘roll’ their respective positions.” This had been specifically designated as a potential risk for the two ETFs in question –– in addition to the “extreme volatility and low liquidity” attributed to both Bitcoin spot and derivatives markets.
In today’s three orders, the SEC has however notably stated that:
“[The agency] emphasizes that its disapproval does not rest on an evaluation of whether bitcoin, or blockchain technology more generally, has utility or value as an innovation or an investment.”
”When the spot market is unregulated –– there must be significant, regulated derivatives markets related to the underlying asset with which the Exchange can enter into a surveillance-sharing agreement.”
This July the SEC rejected the Winklevoss’ petition following their initial application’s denial, in which the twins claim that crypto markets are “uniquely resistant to manipulation.” In their rejection of the petition, the agency said that “the record before the Commission does not support such a conclusion.”
At the beginning of August, the SEC delayed its decision over yet another Bitcoin ETF application –– this time filed by by investment firm VanEck and financial services company SolidX, for trading on CBOE. Notably, instead of proposing a Bitcoin futures-based fund, the application proposed a physically-backed model, which will raise the further question of custody.
Bitcoin is currently trading around $6,380, down about 2.2 percent on the day to press time.
Bakkt — the forthcoming regulated global ecosystem for crypto assets recently unveiled by Intercontinental Exchange (ICE) — will not support margin trading for its Bitcoin (BTC) contract, according to an official Medium post published August 20.
Earlier this month, ICE –– the operator of 23 leading global exchanges including the New York Stock Exchange (NYSE) –– had unveiled ambitious plans to create a “seamless” global ecosystem for digital assets that would cover the spectrum from federally regulated markets and warehousing to merchant and consumer needs.
The announcement notably revealed plans to offer a 1-day physically delivered BTC contract by November, subject to pending approval from US regulators.
Bakkt’s CEO Kelly Loeffler has today outlined the three cornerstones of the project, which she says will aim to establish a “consistent regulatory construct,” institutional-grade pre- and post-trade infrastructure and “transparent, efficient price discovery” for crypto trading. Loeffler has today said that physical delivery is “a critical element” for this latter point, adding that:
“Specifically, with our solution, the buying and selling of [B]itcoin is fully collateralized or pre-funded. As such, our new daily bitcoin contract will not be traded on margin, use leverage or serve to create a paper claim on a real asset.”
The CEO underscores that these plans differentiate the platform’s strategy from existing BTC futures contracts, such as those currently offered on CME and CBOE, which are ultimately settled in fiat currency.
By refraining from allowing for margin, leverage and cash settlement –– and offering secure and regulated warehousing –– Loeffler claims that the platform will better support market integrity and enable the “trusted price formation” that she considers to be key to “advancing the promise of digital currencies.”
While Loeffler’s announcement largely confirms what had been already indicated in ICE’s initial announcement, this explicit and detailed affirmation of the project’s intentions has today been welcomed by the crypto community.
News of the forthcoming platform has drawn considerable attention and excitement over the past two weeks, yet there are nonetheless some who have voiced concerns as to the potentially adverse impact leverage-based financialization could have for the crypto space. These echo existing controversies over the impact of futures trading since their launch in late 2017, a likely impetus for Loeffler’s emphatic differentiation today.
The world of futures trading in Bitcoin for the traditional investor is still very new, as it only opened in December of last year when CBOE and CME launched their products to the market in what was expected to be a big boost for Bitcoin adoption.
However, for those already involved in cryptocurrencies, there have been opportunities to trade Bitcoin futures — along with other cryptocurrency futures — since before the big CME and CBOE launch dates. In fact, OKEx announced its BTC, BCH and ETH futures trading on November 3, 2017.
But, even with this jump on the futures market, and being the second-largest cryptocurrency exchange by volume, OKEx has had its issues with futures trading thus far. First, there was abnormal pricing on March 30 which they had to deal with, bringing with it a threat from a trader that they would attempt suicide if the issue was not resolved.
Then, in May, OKEx had to deal with China National Radio’s (CNR) “Voice of China” program that alleged that OKEx was illegally trading cryptocurrency futures in the country, which has essentially banned all usage of digital currencies within its border.
Now, on August 3, OKEx was faced with a sticky situation in which a ‘Whale’ trader’s wrong-way bet on Bitcoin forced a liquidation of a futures contract, forcing other traders to foot the bill. The latest issue means that those with unrealized gains on their short positions this week are set to lose 18 percent of their profits.
Speaking to Cointelegraph, OKEx head of operations, Andy Cheung, said that this has been a “valuable lesson” for him and OKEx, as they continue to try to improve the trading experience. However, Cheung also admits that there has not been too much fallout from their clawback mechanism, nor damage to the futures trading sentiment.
One trader’s bad decision
Cheung put this forced liquidation of a misfired Bitcoin futures trade — with a notional value of $416 million — down to “merely a bad decision of a trader.”
On July 31, an anonymous trader triggered OKEx’s risk management alert system when a long position was placed that contained a massive 4,168,515 contracts. Due to the sheer size of the position, the exchange contacted the trader and asked several times to “partially close the positions to reduce the overall market risks.”
“However, the client refused to cooperate, which [led] to our decision of freezing the client’s account to prevent further positions [from] increasing. Shortly after this preemptive action, unfortunately, the BTC price tumbled, causing the liquidation of the account,” the official statement read.
The ramifications of this liquidation means that counterparties are being left to foot the bill, due to what is known as a “socialized clawback” policy for cases where a trade shortfall occurs.
OKEx have a well-defined policy as to what is done when a forced liquidation occurs, it states:
“OKEX Futures uses a ‘full account clawback’ system to calculate the clawback rate. The system’s margin call losses from all three contracts will [be] merged and clawbacks will be calculated according to each user’s entire account profit, instead of calculating each contract’s margin call loss and clawback separately. Only users that have a net profit across all three contracts for that week will be subject to clawbacks. Clawbacks will only occur if the insurance fund does not have enough funds to cover the system’s total margin call losses.”
In order to try to mitigate some of the losses, OKEx immediately pumped 2,500 BTC (around $18.5 million) into an insurance fund. However, this was not enough to cancel out the damages.
Despite this negative instance for futures trading in Bitcoin, as well as the expenses that the counterparties are left to foot after this anonymous trader’s “bad decision,” Cheung says there was not much lasting damage done.
“From our data, we do not see any signs of the market sentiment being affected by this incident. We also do not see any signs of our customers’ sentiment being greatly affected.”
Learning a lesson
While a lot of what happened fell a bit outside of OKEx’s control, such as the outlandish trade and the volatile movement of Bitcoin that forced the liquidation, OKEx says it was a valuable lesson for themselves, but is also encouraging futures traders to understand the mechanisms.
“We would say this is a valuable lesson for us in improving our trading experience. We always encourage our customers to study the mechanism behind futures trading before joining the game to avoid unexpected losses.”
The clawback mechanism is one which seems to be a bit of an unknown danger for futures traders who rush into things. However, OKEx has made it abundantly clear that this is the price to pay in certain, unfortunate circumstances.
“The clawback mechanism has been running orderly since [it] launched, and it is widely adopted by major exchanges around the world. Another major exchange that provides margin trading, BitMEX, also adopts a similar auto-deleveraging mechanism, which closes liquidation orders by deleveraging counterparties’ positions by profit and leverage priority.
“We believe this mechanism balances the interests between all parties involved. Not only does this mechanism stabilize our platform’s operations, but also insures traders’ assets on our platform. Without this mechanism, any trading platform will risk shutting down along with all the traders’ assets.”
Still, it is an unfortunate thing for traders to have to deal with because of one bad move by one other trader, and because of that, Cheung adds, they are trying to make these less frequent, and less costly.
“That being said, we are taking efforts to eliminate the risk of large-scale clawback in the future. We have already launched a series of enhancement measures before this incident happened. We will also enhance the education of futures trading for our users, so that they can fully understand the mechanism behind it and will be able to make well-informed decisions.”
Long road to go
Futures trading in Bitcoin, as well as other cryptocurrencies, still has a long road to go before it can be considered totally fail-safe — and even then, there are bound to be mishaps. However, like Cheung says, there are lessons to be learned as the trading option matures in this new and volatile space.
Bitcoin is still a very new asset class, relative to others that are used in futures, and as such, traders are still in the experimental stages. It will take some time to iron out issues that crop up in this new form of trading, but by trying to mitigate the losses, it should be a relatively painless process to get Bitcoin futures operating smoothly.
In the interview, Duffy said that the company should first evaluate and develop an approach for Bitcoin, stressing that Bitcoin futures “might have been the most controversial launch of a product.”
Duffy emphasized that altcoins futures contracts cannot be launched immediately, because they are “highly volatile and new,” and the company cannot just list products for trading in order “to see where they’re going to go.” Duffy said, “I will take a wait and see approach with Bitcoin for now.”
The CEO reiterated the company’s previous position on launching altcoin futures, having said earlier this year that listing other crypto would be “a little irresponsible right now.”
CME, one of the largest exchanges worldwide, launched Bitcoin futures trading on Dec. 17, a week after BTC futures were introduced by the the biggest U.S. options exchange, the Chicago Board Options Exchange (CBOE).
While CME is taking a cautious approach to introducing altcoin futures, its main competitor CBOE is “definitely monitoring other markets,” CBOE’s director for product development Dennis O’Callahan revealed in an interview with Cointelegraph. O’Callahan said, “…we are definitely monitoring other markets to make sure that the infrastructure and everything is in place in case we want to pursue other cryptocurrencies.”
Last week, CME reported that its BTC futures average daily volume (ADV) increased by 93 percent in the second quarter over the first quarter of 2018, while the number of open contracts on Bitcoin futures has exceeded 2,400, which amounted to 58 percent increase since Q1.
In the days following the strong upswing that kicked off across the crypto market on July 16 and accelerated further on July 17, Bitcoin has sustained positive momentum while other alts slid into negative territory.
Market visualization from Coin360
Bitcoin (BTC) is trading around $8,009 to press time, up 3.9 percent on the day. The leading asset gained over $200 dollars within the space of an hour and a half this morning to hit $7991, and then broke the $8,000 resistance level, peaking at a 24-hour high of $8,031.
Bitcoin’s weekly and monthly gains are now at around 3.8 and 34 percent respectively, according to data from CoinMarketCap.
Bitcoin 24-hour price chart. Source: Cointelegraph Bitcoin Price Index
Yesterday, BTC dominance by market capitalization in the crypto market reached its highest level yet in 2018, passing 46 percent, a threshold last seen December 20, 2017, when the coin was trading close to its industry highs of $20,000. Today, dominance has inched up yet further to 46.8 percent by press time.
Percentage of total market cap (dominance) from CoinMarketCap
Ethereum (ETH) is trading around $468 at press time, up 1.2 percent on the day. Having peaked at $510 on July 18, the asset’s subsequent decline saw it dip to $444 by July 20. Today, the altcoin has seen modest growth, reaching a 24-hour high of $472. Ethereum has lost just under 1 percent on the week, but is now up 4.77 percent on the month.
Ethereum’s 24-hour price chart. Source: Cointelegraph Ethereum Price Index
On CoinMarketCap’s listings, the top 10 coins by market cap are seeing mixed red and green, with some alts seeing solid growth of above 4 percent.
Of the top 20 ranked coins on CoinMarketCap, anonymity-oriented altcoin Monero (XMR) is the strongest performer. Monero is up almost 4 percent and is trading around $140 at press time. Breaking $148 July 18, the coin saw a subsequent decline to $127 on July 21, and traded sideways until yesterday’s uptick, which continues today.
Monero 7-day chart. Source: CoinMarketCap
Total market capitalization of all cryptocurrencies is around $294 billion at press time, inching closer to its intra-weekly high of around $300 billion.
Weekly high in the total market capitalization of all cryptocurrencies from CoinMarketCap
While the market is seeing a more mixed picture today, Bitcoin’s recent divergence from other crypto assets has prompted CNBC trading advisor Ran NeuNer to venture that we may be on the cusp of a bull market. The analyst attributes the top coin’s strong performance to news earlier this month that the $6.3 trillion asset manager and ETF-giant BlackRock is beginning to assess potential involvement in Bitcoin. As per NeuNer’s scenario:
“-BTC goes up in anticipation of ETF at the expense of Alts.
– Investors start to pay more attention to BTC as it is getting returns.
– New money flows in again including institutional funds.
– BTC runs , investors exit and invest in Alts.
– Bull market again…”
While many hold the view that crypto-based ETFs would be a “holy grail” for the crypto industry, news that BlackRock may also be eyeing an entry into Bitcoin futures trading could prove more divisive, given suggestions from figures including Fundstrat’s Tom Lee that Bitcoin’s “gut wrenching” price weakness this spring was tied to futures contract expirations.
This week, CME revealed that the average daily volume of Bitcoin futures on its platform increased by 93 percent in Q2 over Q1 in 2018, also indicating that the number of open contracts had exceeded 2,400 — a 58 percent increase over Q1.
Bitcoin (BTC) futures average daily volume (ADV) at the Chicago Mercantile Exchange (CME) increased by 93 percent in the second quarter over the first quarter of 2018, the company revealed in a tweet July 20.
CME also stated that the rate of open interest (OI) or the number of open contracts on Bitcoin futures has exceeded 2,400, which amounted to 58 percent increase in Q1.
CME Bitcoin Futures ADV and OI in Q1 2018 and Q2 2018. Source: CMEGroup
One of the biggest global exchanges, CME Group launched Bitcoin futures trading on Dec. 17, following the launch of BTC futures by the Chicago Board Options Exchange (CBOE), the largest U.S. options exchange, on Dec. 10.
In May, the Federal Reserve Bank of San Francisco published an Economic Letter alleging that the Bitcoin price decline following the $20,000 all-time high in December was the result of the introduction of Bitcoin futures. The Fed claimed that “the rapid run-up and subsequent fall in the price” after the launch of BTC futures trading “does not appear to be a coincidence.”
Earlier this month, the largest exchange-traded fund (ETF) supplier in the world BlackRock, announced it is forming a working group to consider whether the company should invest in Bitcoin futures. Considering Bitcoin futures represents a U-turn for BlackRock, which has previously been critical of cryptocurrencies.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, you should conduct your own research when making a decision.
Since their triumphant advent in the wake of the December 2017 bull run, Bitcoin futures seem to have occupied an oddly fixed position in the minds of many cryptocurrency buffs. A popular view among those who follow the dynamics of the crypto world rests on a set of established points about BTC futures: they exist since late 2017; they are offered by Cboe and CME, two respectable regulated exchanges; they help manage investment risks and as such are supposed to draw institutional money into the crypto space, mitigating price volatility and lending credence to the underlying asset.
The recent weeks, however, saw a shift in this previously serene mental landscape, as new considerations about crypto futures began to pour into media space with increased frequency. From allegations of massively suppressing crypto prices to a widening range of platforms offering crypto derivatives to a real prospect of Ethereum futures coming about soon, these developments point to the need of revisiting the realm of cryptocurrency-based futures. Now that these derivatives have been around for more than half a year, a more nuanced picture of this asset class’ role in crypto finance is emerging.
In the simplest terms, a futures contract (or a future) is an agreement to buy or sell a certain product on a fixed date. Futures are used as both an instrument for mitigating risks associated with price volatility of vital commodities, and as a tradable derivative product. A comprehensive Cointelegraph primer timed to the launch of the first regulated BTC futures last December is still there for anyone in need to recapitulate the essentials.
There were many reasons for the crypto community to eagerly anticipate Bitcoin futures’ introduction to regulated derivatives markets. Futures have long been seen as the first stepping stone on the path to reconciling the world of crypto finance with the system of traditional financial institutions. Existing within a well-defined legal and operational framework, futures contracts offer legitimacy and security that judicious Wall Street firms were waiting for in order to finally jump onto the crypto bandwagon.
Some of the collateral perks included increased liquidity of the market and transparent reference prices – in other words, more legitimacy and stability. At the same time, crypto futures held a promise for an alleged horde of retail investors who were interested in crypto assets yet wary of trading them on unregulated spot exchanges. Perhaps the biggest advantage of Bitcoin futures for this category of traders is security: since owning a cash-settled crypto future does not entail touching a coin itself, the scheme does away with fears of hacking and theft of cryptoassets. However, a flipside of not owning an actual coin is that futures traders would not be eligible for free coins in an event of a fork.
As the Chicago Board Options Exchange launched cash-settled Bitcoin futures trading on December 11, and their rivals Chicago Mercantile Exchange followed suit six day later, prices of both BTC derivatives and the coin itself surged amid an unprecedented wave of publicity. Each Cboe contract was for one Bitcoin, while each CME futures represented five. Both enabled traders to take either long (agreement to buy) or short (agreement to sell) positions, meaning that investors could bet on both increase and decline of Bitcoin price.
Cboe capitalized on their partnership with Gemini, a cryptocurrency exchange ran by the Winklevoss brothers, and used their experience with tracking crypto assets’ prices to create a tool called Cboe Gemini Bitcoin Futures Index. CME Group created its own price tracking instruments, CME CF Bitcoin Reference Rate and CME CF Bitcoin Real Time Index, in cooperation with a UK-based firm Crypto Facilities, which has a vast experience with cryptocurrency derivatives.
Playing into bears’ hands?
Despite the tremendous hype, it turned out quite soon that the volume of Bitcoin futures trading is not as impressive as the some enthusiasts could expect, eliciting the first wave of pointed criticisms. The fact that after the initial spike Bitcoin prices went steeply downhill in January did not help the derivatives market’s growth, either.
Mati Greenspan, Senior Market Analyst with a social trading and multi asset brokerage firm eToro finds this dynamic unsurprising:
“The Bitcoin futures have indeed opened up the markets to new investors who wouldn’t otherwise be involved. However, the volumes so far have been rather tepid, which isn’t much of a surprise. Bitcoin’s price has been falling steadily this year and as long as the direction is down, there’s little incentive to jump in.”
While it is enticing to attribute the underwhelming trading volumes to the decline in the underlying assets’ valuation, some observers point out that the two are actually tied in a kind of an egg-and-chicken cycle, mutually influencing each other. As early as in January, when a multitude of versions explaining the crash of Bitcoin price began to emerge in media space, one of the less-visible yet sound considerations was that futures trading had opened the crypto markets to bear investors.
A curious pattern showcasing retail and institutional investors’ diverging strategies with regard to futures trading could serve as indirect evidence to such claims. As a January Wall Street Journal study had uncovered, ‘little guys’ were the ones who were more likely to wager on the rise of BTC prices, while institutional players tended to short.
At the time, however, these concerns seemed to have faded from the mainstream media’s radars. It wasn’t until May that they resurfaced full-blown following the publication of the San Francisco Federal Reserve Bank’s letter suggesting that the advent of Bitcoin futures and the coin’s price decline did not ‘appear to be a coincidence.’ The Fed analysists explained that the rise of crypto futures for the first time gave the ‘pessimists’ a tool to counteract the ‘optimists’ who had previously fueled the growth unimpeded. Another attestation in a similar vein has been Fundstrat’s Thomas Lee’s attribution of falling Bitcoin prices to Cboe futures’ expiration that made rounds in mid-June.
Yet the issue seems to be far from settled towards either of the two poles: those voices who blame Bitcoin futures for declining crypto prices encounter equally robust arguments from the other side.
“I’ve done the math recently and it doesn’t seem to add up,” – says Mati Greenspan, maintaining that the size of the futures market is simply not sufficient to thrust the whole crypto ecosystem into an extended bear cycle.
Rohit Kulkarni, Managing Director and Head of Research for investment platform SharesPost, acknowledges some influence that ‘pessimistic speculators’ have exerted, but attributes the bulk of the blame to the regulatory turbulence of the first half of 2018:
“The subsequent [to December 2017] bitcoin price declines were not caused by the introduction of these futures, but rather the regulatory uncertainty surrounding the cryptocurrency market. In addition, we believe irrational speculation by pessimistic investors has also contributed to the price movement over the past six months. As such, we see the ongoing crypto bear market as clearly cleansing the ecosystem from short-term oriented speculators, which will be good for the crypto ecosystem long-term.”
Over the last half a year, Cboe and CME were not the only entities to have a dig at crypto futures, and Bitcoin was not the only asset underlying these contracts. Since March, UK-based financial institutions were responsible for a steady supply of breaking news in this domain. In March, a British cryptocurrency exchange operator Coinfloor made headlines by announcing the launch of the first physically settled Bitcoin-based futures product.
Also in March, it suddenly emerged that the abovementioned startup Crypto Facilities has been offering futures contracts tied to Ripple’s XRP token since October 2016, without much publicity, for some reason. On May 11, Crypto Facilities exploded another bombshell in the crypto space, revealing ETH/USD futures as their latest offering. And to crown it all, in June the same company unveiled the first regulated Litecoin futures.
Due to regulatory hurdles, staggering cavalry charges like these would hardly be possible across the Atlantic. Some of the established players in the US, who seem to be in a position to join the crypto derivatives race, remain undecided.
Yet this is not to say that the US companies halted their efforts to facilitate crypto-based derivatives trading. During the first week of May, the New York Times reported that both Goldman Sachs and the New York Stock Exchange were briskly moving ahead with their plans to launch crypto trading platforms and products. A few weeks later, a Pennsylvania-based Susquehanna International Group listed Bitcoin futures among their financial products.
The Ides of June saw a regulatory breakthrough that might prove highly consequential for crypto futures in the US, as the SEC Corporation Finance Director William Hinman had shed some light on Ethereum’s status as perceived by the regulator, suggesting that ‘current offers and sales of ether are not securities transactions.’ This statement has energized the industry and prompted Chris Concannon, Cboe’s crypto-savvy president, to speak of futures on ETH as of a settled deal. If Cboe breaks the path with such a product, it’s not difficult to imagine CME catching up quickly, given the firm’s partnership with Crypto Facilities, whose Ethereum derivatives infrastructure is already in place.
Evidently, despite all the challenges, cryptocurrency-based futures have to a significant extent succeeded in facilitating institutional capital’s entry into the cryptofinancial ecosystem. Most experts are positive with regard to further development of this trend, envisioning crypto assets as a legitimate element of the financial system.
“As we approach the anniversary of futures trading, we expect more institutional investors to make big moves with crypto dedicated funds. One recent example of this was the recent announcement of A16Z, a $300 million crypto fund launched by Andreessen Horowitz dedicated to investing in cryptocurrencies and other blockchain-related projects,” – notes Kulkarni.
Shane Brett, Co-founder and CEO of blockchain solutions provider GECKO Governance, appears to be on the same page:
“The emergence of cryptocurrency futures is a definite sign of increased mainstream adoption on the horizon, as it serves to speed up the legitimation and maturation of the market.”
Speaking of the ‘little guy’ retail investor, the direct benefits of the introduction of crypto futures have likely been more modest so far.
“There really isn’t much benefit for Main Street investors to use the Wall Street futures. They can just as easily buy bitcoin directly. As well, the minimum contract size on the futures could be a barrier to entry. The contracts of the CME are set at blocks of 5 BTC each, which is more than most retail customers are used to dealing with. Even the CBOE contracts that are set at 1 BTC each are difficult to deal with for most people,” – concludes eToro’s Mati Greenspan.