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Bakkt Begins Testing Bitcoin Futures

Bakkt has begun testing its physically delivered Bitcoin futures, as experts predict a full launch this quarter.

Bakkt, the long-awaited Bitcoin (BTC) futures platform from the Intercontinental Exchange (ICE), has begun testing the delivery of BTC futures, according to an official tweet on July 22.

Per the tweet, user acceptance testing for Bitcoin daily and monthly futures began today with participants from around the world.

The platform initially announced the launch of futures testing in June, when Bakkt COO Adam White stated, “On July 22, two days after Apollo 11’s 50th anniversary, Bakkt will initiate user acceptance testing for its Bitcoin futures listed and traded at ICE Futures U.S. and cleared at ICE Clear US.”

White then said that the introduction of Bitcoin futures will help usher in more institutional participation in cryptocurrency markets. 

Bakkt’s Bitcoin futures are physically delivered via a process called “warehousing,” which will purportedly bode well from a price discovery standpoint, but cause some concern among regulators. 

Bakkt has experienced several delays regarding its launch as regulators like the United States Commodity Futures Trading Commission investigated the platform’s compliance procedures and its possible effect on markets.  

Last week, Sam Doctor, the managing director and quant strategist at Fundstrat Global Advisors, predicted that full futures trading on Bakkt will launch this quarter. Doctor said:

“There appears to be a critical mass of adopters ready to come on board on Day 1 of the Bakkt launch, with the sales team gaining traction among brokers, market makers, prop trading desks and liquidity providers.”

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Fundstrat Strategist: Bakkt Futures to Launch in the Current Quarter

Bakkt’s crypto futures contracts to launch in the current quarter per a Fundstrat strategist’s account of Bakkt’s recent event.

Managing director and quant strategist at Fundstrat Global Advisors Sam Doctor suggested in a Twitter post published on July 19 that Bakkt’s Bitcoin (BTC) futures contracts will launch this quarter.

According to the post, which includes a summary of Fundstrat’s takeaways from the Bakkt Digital Asset Summit held on July 18, the firm’s futures will launch in the current quarter. The launch is set to follow tests announced last month, which are scheduled to start next week. The firm believes that the launch will be a catalyst to accelerate entry of traditional institutional investors. The post notes:

“There appears to be a critical mass of adopters ready to come on board on Day 1 of the Bakkt launch, with the sales team gaining traction among brokers, market makers, prop trading desks and liquidity providers.”

During the aforementioned event, Commodities Futures Trading Commission (CFTC) commissioner Dawn Stump apparently expressed that no current cryptocurrency could threaten financial stability and that the regulator sees a growing demand for Bitcoin futures from the public. Also during the summit, chief information officer at crypto investment firm Blocktower Ari Paul was reportedly confident that once a killer app or user interface makes cryptocurrency on-ramps safe, reliable and as easy to use as Paypal, retail adoption will be enormous.

According to the Fundstrat notes, Paul also said that institutions should not dismiss crypto assets, considering their low correlation with traditional assets and with compound annual growth rates of 200%-300%. He also said that inflation and confiscation resistance of cryptocurrencies are a key value proposition.

Pantera Capital CEO Dan Morehead, on the other hand, said that most tokens will fail and a handful of base protocols will survive, but with thousands of decentralized applications built on top of them. 

As Cointelegraph reported in May, the Intercontinental Exchange is reportedly taking steps to ensure approval from the United States CFTC for Bakkt.

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Derivatives in Crypto, Explained

From mitigating risks to gaining on price difference: A multifaceted world of financial derivatives and their application in crypto, reviewed.

Are there any downsides of trading crypto derivatives?

All trading strategies related to price fluctuations imply a certain level of risk, especially combined with the lack of relevant regulation for the crypto derivatives sector. 

When it comes to crypto derivatives, the biggest risk that traders face is volatility. Prices can rise and fall at speeds that make your head spin, and losses can be amplified substantially whenever someone is trading on margin.

To better help mitigate these risks, a tiered maintenance margin ratio system has been adopted by OKEx to avoid the liquidation of large positions, events that can have a huge impact on market liquidity. During a recent “flash crash,” when Bitcoin suddenly plunged from $7,800 to $6,100 in just five minutes, OKEx’s risk management system managed to stabilize the quarterly contract price from a fierce fluctuation — at about $7,000 — while other crypto exchanges offering derivatives experienced a nosedive, as shown in the graph involving other market players such as BitMEX derivatives prices.

This market is a complex beast, and it can be difficult to navigate for inexperienced users. Rookie mistakes can be extremely costly, and the unpredictability of crypto derivatives greatly amplifies the likelihood of something going wrong. As a result, it’s important to fully understand the features that a trading platform can offer, follow the tutorials and make sure you have a solid strategy in place.

It’s also worth paying close attention to regulation. Regulators in different countries are cautious about crypto futures and other types of such contracts — as well as with cryptocurrencies themselves. The U.S. Securities and Exchange Commission (SEC) is closely monitoring the area and has already filed charges against an international dealer, who was illegally offering Bitcoin-funded, security-based swaps in the country. At the same time, the European Economic Area has not yet elaborated clear guidelines on how to treat crypto derivatives and how they should be regulated.

The article was co-authored by Connor Blenkinsop.

Where can I trade crypto derivatives?

Crypto derivatives of different kinds can be traded officially both on traditional exchanges and regulated crypto exchanges. 

As per traditional exchanges, Bitcoin futures are currently offered by CME Group, as CBOE stopped adding new contracts in March. Meanwhile, in December 2018, Nasdaq stated it was considering launching Bitcoin futures in the first half of 2019. As cryptocurrencies are expected to gain more mainstream and institutional adoption, it is highly likely that more traditional players will trade crypto derivatives soon. 

Institutional exchanges are also offering these types of contracts. Institutional crypto derivatives provider LedgerX started trading regulated swaps and options contracts in October 2017, shortly after receiving approval from the U.S. Commodity Futures Trading Commission (CFTC). Another institutional crypto platform, Bakkt, delayed the launch of its Bitcoin futures trading several times but has finally scheduled the testing of the product for July 2019.

Major crypto exchanges are also actively involved in crypto derivatives trading. Malta-based OKEx offers futures and perpetual swaps trading, which is a contract with no expiration, with 100x leverage, and delivers them through an optimized and scaling engine. A range of popular crypto assets such as Bitcoin, Ether and EOS are supported — and USDK, a newly launched stablecoin, is also listed.

How are derivatives used in crypto trading?

Cryptocurrencies are increasingly gaining popularity, and there are more traders who want to benefit from price fluctuations. 

Bitcoin’s rate has had a wild ride over the past two years — surging to its all-time high around $19,800 and then losing one-third of its value in just a few days, continuing to drop throughout 2018 to as low as $3,200. However, in April 2019, things started to change again, and the current price of Bitcoin — over $12,171, as of press time — is far from pessimistic. 

Bitcoin futures trading was launched by the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME) during the peak of the crypto bull market in December 2017. The move was a huge milestone for the whole crypto industry, as a futures contract allows investors to hedge positions and reduce the risk of the unknown, which is quite relevant for cryptocurrencies. In other words, trading Bitcoin and altcoin futures enables major traders to mitigate their risks by signing a contract that settles directly to an underlying auction price of a particular cryptocurrency. 

Moreover, there are, obviously, many traders who want to benefit from those drastic changes by trading derivative contracts for Bitcoin and major altcoins. To make a profit from a sudden change in the underlying asset’s price, the trader can buy a cryptocurrency at a low price and sell it at a higher price later. However, this strategy is only relevant during a bull market and is quite risky, as are all other attempts to speculate on the price of the underlying asset.

Another strategy is called shorting, which is a way to profit even from a crypto bear market or a market that is currently experiencing a downtrend. To short, the traders usually borrow the assets from a third party — whether it be an exchange or broker — and sell them on the market when they expect the price to decrease. As the coin’s price goes down, the trader purchases the same amount of assets back for a lower price and profits from the price movement, while the exchange or the broker gets paid a commission.

What are the common forms of derivatives?

There are four major types of derivatives: futures, forwards, swaps and options. 

Futures and forwards are similar types of contracts with only slight differences. Thus, futures oblige the buyer (or buyers) to purchase the asset at a previously agreed-upon price on a specific date in the future. These futures are traded on exchanges, and the contracts, therefore, are similar and standardized. As for forwards, this type of contract is more flexible and customizable for the needs of both traders. As forwards are normally traded on over-the-counter (OTC) exchanges, counterparty risks should always be taken into account. 

Options grant the buyer the right to purchase or sell the underlying asset at a certain price. However, according to the terms of the contract, the trader is not necessarily obliged to buy the asset, which is a key difference between options and futures.

Swaps are derivative contracts that are often used between two parties to exchange one type of cash flow for another. The most popular types of swaps are related to interest rates, commodities and currencies. Normally, swaps imply the exchange of a fixed cash flow for a floating cash flow. That is, a trader can choose an interest rate swap to switch from a variable interest rate loan to a fixed interest rate loan, or vice versa.

Why would a trader use derivatives?

Derivatives are generally used to hedge risk or to speculate on the price of the underlying asset in case it changes. 

Derivatives are used in many areas but mainly for hedging purposes, namely when investors want to protect themselves from price fluctuations. In this case, signing a contract to buy an asset for a fixed price would help mitigate related risks. Another way to take advantage of derivative trading is speculation, when traders are trying to predict how the asset’s price might change over time. That is the reason why high-profile American investor Warren Buffet once called derivatives “financial weapons of mass destruction,” sharing a commonly held view that they were to blame for the 2007-2008 global financial crisis.

There are many ways in which derivatives can be applied in real life. For instance, prior to the aforementioned crisis, major United States holding company Berkshire Hathaway started selling put options on four equity indexes, including the S&P 500 and FTSE 100. A put option is a form of derivative that gives the owner the right, but not the obligation, to sell an underlying asset to the seller of the put at a specified price by a predetermined date. In this case, Berkshire Hathaway offered investors the chance to purchase an option premium and therefore buy the ability to sell their stocks at an agreed-upon price and date. When the date finally came, they could earn money by selling a stock whose price had visibly decreased. However, if the price has been rising through that period of time, the company received the option premium. In this particular case, Berkshire Hathaway took the risk and earned around $4.8 billion as a result. 

Another interesting example of using derivatives comes from the airline business. As airlines are heavily dependent on jet fuel, the price of which continually sees ups and downs, it is very useful for the business to implement appropriate derivative hedging strategies. The world’s largest low-cost carrier, Southwest Airlines, which operates in the U.S., is a well-known example of success in this area. Because of its well-designed hedging program, the airline managed to lock crude oil prices at a very low rate and has therefore been paying between 25% and 40% less for its jet fuel than its competitors for years. 

Some use cases are nowhere near traditional finance systems. For example, there is a whole segment of weather derivatives aimed to protect farmers, commodity providers and others from weather-related losses, such as frost or hurricanes.

What is a derivative?

A derivative is a financial contract between two or more parties based on the future price of an underlying asset. 

Financial derivatives are discussed a lot when it comes to the crypto industry, especially concerning futures contracts for Bitcoin or altcoins. It is worth noting that the derivative is one of the oldest forms of a financial contract that exists on the market. The history of this type of deal can be traced to antiquity: In medieval times, derivatives were used to facilitate trades among merchants who traded all over Europe and participated in periodical fairs, an early form of markets in the Middle Ages.

Derivatives have evolved for centuries to become one of the most popular financial tools. Nowadays, a derivative is understood as a security that derives its value from an underlying asset or benchmark. The contract can be signed between two or more parties that want to buy or sell a particular asset for a specific price in the future. The value of the contract will therefore be determined by changes or fluctuations in the price of the benchmark it derives its value from.

Normally, the underlying assets used in derivatives are currencies (or cryptocurrencies), commodities, bonds, stocks, market indexes and interest rates. Derivatives can either be traded on exchanges or customer-to-customer (C2C), which is quite different in terms of regulation and manner of trading. Normally, however, active traders use both methods.

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CME Bitcoin Market Has Record Month, Could Boost BTC High

CME’s Crypto Market Sees Massive June

According to a recent report from CoinDesk, Bitcoin futures on the CME — one of the world’s leading derivatives market — saw a stellar June. The Chicago-based platform’s BTC-related vehicles were traded by over 2,960 accounts, most of which are purported to be hedge funds, large investors, institutional players, and cryptocurrency funds/miners.

This massive number of investors utilizing the CME’s Bitcoin amenities — the highest to-date — coincided with a 30% surge in account sign-ups, clearly accentuating that the asset’s recovery to $10,000 is driving investors back into BTC. Year-to-date, the CME has registered 1,000 new accounts to trade Bitcoin futures.

Also, the amount of open interest in the CME’s Bitcoin futures hit 6,069 contracts, amounting to over 30,000 BTC. And the number of clients holding over 5 contracts moved from 46 to 49 over June, implying that bigger investors are starting to trickle back into the cryptocurrency ecosystem.

Bitcoin Could Surge Off Renewed Institutional Interest

While it isn’t clear how futures trading has affected the value of Bitcoin, Mike Novogratz has suggested that renewed institutional interest will be a primary catalyst for BTC to head higher, potentially to $20,000 and beyond.

As reported by Ethereum World News, the former Wall Street hedge fund manager on Tuesday explained what he thinks will be a massive boon for Bitcoin in the years to come. This is, of course, institutional involvement. Novogratz told Bloomberg:

“I’m not selling the next time we hit $14,000. The second time we reach that level, [there may be] a move to $20,000. I don’t expect this to happen in the next few weeks: I don’t expect it to the middle or the end of the fourth quarter. But the next wave will come when the institutions — the state of X, Texas Teachers Union, and those guys — come in, and then you will see Bitcoin hit $20,000 and higher.”

The aforementioned CME data suggests that institutions are already well on their way back into this space. What’s more, upstart cryptocurrency exchanges backed by Wall Street giants, namely ErisX, LedgerX, and the New York Stock Exchange’s Bakkt, have secured the proper licenses from American financial regulators to soon list Bitcoin-backed vehicles.

Also, TD Ameritrade and supposedly E*Trade, two leading brokers in the U.S., are soon expected to launch spot cryptocurrency trading, which many say will give retail and institutional investors alike a regulated, trusted way to siphon money into Bitcoin. As Novogratz explained:

“You can buy bitcoin on your TD Ameritrade trading account. That’s a big deal because the general population has not signed up and got a Coinbase or Circle wallet yet. We are going to see in the next three to eighteen months more ways to buy bitcoin.”

Whether or not this translates into positive price action isn’t clear just yet. But one thing is for certain: big corporations are eyeing Bitcoin, and seem poised to want to capture demand from a retail audience.

Photo by Brad Knight on Unsplash

The post CME Bitcoin Market Has Record Month, Could Boost BTC High appeared first on Ethereum World News.

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US CFTC Approves LedgerX’s Application for Designation As Contract Market

LedgerX, a U.S.-based regulated crypto derivatives and clearing platform, has received CFTC approval to operate as a designated contract market.

The United States Commodity Futures Trading Commission (CFTC) has approved the application of LedgerX LLC for designation as a contract market, according to an announcement published on June 25.

LedgerX — a U.S.-based regulated crypto derivatives and clearing platform — can operate as a designated contract market (DCM) as of June 24, 2019. The company’s activities will be registered under Section 5 of the Commodity Exchange Act (CEA) and Part 38 of the CFTC’s regulations.

Registration as a DCM will require that LedgerX maintain compliance with all applicable provisions of the CEA and CFTC regulations. “LedgerX has requested that the CFTC amend its order of registration as a DCO, which limits LedgerX to clearing swaps, to allow it to clear futures listed on its DCM,” the announcement further reads.

LedgerX initially applied for a designated contract market license that would allow it to launch the new futures product in April. LedgerX’s co-founder Juthica Chou said at the time:

“We’ve long had the goal to expand the range of customers we can serve beyond our institutional base — it’s the natural next step for us. Omni, by interfacing with our existing institutional liquidity pool, will offer retail customers a top tier experience from day one.”

Earlier in June, institutional cryptocurrency platform Bakkt announced that it will begin testing its first product, physically-delivered bitcoin (BTC) futures on July 22. “This launch will usher in a new standard for accessing crypto markets. Compared to other markets, institutional participation in crypto remains constrained due to limitations like market infrastructure and regulatory certainty,” the company’s chief operating officer Adam White said.

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Beat Bakkt: LedgerX to Launch Physically-Backed Bitcoin (BTC) Futures

LedgerX Can Launch Bitcoin Futures

Just a few weeks back, Bakkt revealed that it would be launching its Bitcoin (BTC) futures product for user testing in late-July. But, it seems that another cryptocurrency exchange has beat the New York Stock Exchange-backed initiative to the punch, so to speak.

Announced Tuesday morning, LedgerX, a crypto asset derivatives platform headquartered in the Big Apple, has received clearance from the U.S. Commodity Futures Trading Commission (CFTC). This regulatory green light will allow the company to list physically-settled BTC futures, which are far different than the paper contracts offered by the CME.

You see, unlike cash-settled futures, those holding ‘physical’ (as physical as a Bitcoin can be anyway) contracts are entitled to receive the underlying commodity when the contract matures, compared to just receiving a cash credit. Many analysts have claimed that this new form of Bitcoin-related asset, whether launched through Bakkt or what have you, will allow for better price discovery, presumably on the upside, especially considering the importance of the futures market today in cryptocurrency.

As JP Morgan analysts recently explained in a note, if you disregard all the exchanges deemed “fake” by analytics companies, you’re left with an interesting picture about the Bitcoin market: cash-settled futures make up nearly half the volume. The thing is, none of the capital flowing into this future actually find their way onto the spot BTC market, reducing buy-side or sell-side pressure.

Now back to LedgerX. According to CoinDesk, chief operating officer Juthica Chou has claimed that her company has no exact timeline, but she noted that LedgerX is looking to be the incumbent in this market. Chou adds that LedgerX intends to “serve customers of all sizes”, hinting that there may be a much-needed retail component to this upcoming product, something that Bakkt is seemingly not focusing on yet.

Bakkt Hard at Work

Despite the fact that Bakkt was kind of beat to the punch, the company is still hard at work. According to a recent report from trade publication The Block, Bakkt has just signed a former Google contractor, Chris Peterson, onto its team. The former UX consultant, according to a “person familiar with the situation”, is likely working on a digital asset wallet, dubbed “Bakkt Pay”.

The Block’s sources say that following the release of the long-awaited financial vehicle, the crypto platform may launch the mobile application. Not many details were given about this product, but the outlet points out that Bakkt’s recently-updated website mentions digital payments. 

This news comes months after The Block broke the news that contrary to skepticism, Bakkt is actually working closely with Starbucks, one of the world’s largest restaurant chains. Per their source, the coffee giant has managed to secure a substantial stake in Bakkt in return for “commitment to allow Bitcoin payments in store in 2019”.

Photo by Rohit Tandon on Unsplash

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