Second bitcoin futures debut could lure volume to wild market

NEW YORK: Bitcoin investors expect futures volumes to perk up when CME Group Inc, the world’s largest derivatives exchange operator, launches its own contract to wager on the cryptocurrency.

The second US bitcoin futures launch is seen as another step towards big institutional investors warming up to a volatile asset that had until recently been accessible only via largely unregulated markets.

Like the futures contract launched last week by rival Cboe Global Markets, CME’s will be cash settled. But it will be priced off an index of data from several cryptocurrency exchanges, instead of just one.

“The CME contract is based on a broader array of exchanges,” said Matt Osborne, chief investment officer of Altegris, a US$2.5 billion alternative investments provider based in San Diego, California. “So there is a possibility that the CME contract may generate more interest and more volume.”

The January CME contract will trade on.

Bitcoin has drawn attention for its eye-popping price gains, but it is also notoriously volatile. Bitcoin exchanges and digital currency wallets meanwhile have struggled with issues like outages, denial-of-service (DDoS) attacks and hacks.

Bitcoin hit another record high on Friday near US$18,000 on the Luxembourg-based BitStamp platform, and has soared roughly 1,700 per cent so far this year.

Chicago-based Cboe’s bitcoin futures surged nearly 20 per cent in their debut on Monday, and more than 4,000 contracts changed hands by the end of the 4.15pm EDT settlement.

But the trading volume in the one-month contract, which expires in January, fell to just around 1,500 contracts the next day. By Friday, volume had stabilized at roughly more than 1,000 contracts.

In contrast, trading volume in the Cboe volatility index futures typically runs in the tens of thousands to more than 100,000 contracts, market participants said.

The decline in bitcoin futures volume had been expected, analysts said, given concerns about the cryptocurrency’s underlying volatility.

And discount brokerage TD Ameritrade said on Friday it would allow certain clients to trade Cboe bitcoin futures from Dec. 18, pointing to a potential pickup.

The futures contract price has declined more than five per cent since its launch on December 10.

Some investors believe the CME bitcoin futures could attract more institutional demand because the final settlement price is culled from multiple exchanges.

The Cboe futures contract is based on a closing auction price of bitcoin from the Gemini exchange, which is owned and operated by virtual currency entrepreneurs and brothers Cameron and Tyler Winklevoss.

To be sure, the general sentiment in the market remains one of caution and this has been reflected in margin requirements for the contracts.

In the futures market, margin refers to the initial deposit made into an account in order to enter into a contract.

The margin requirement at CME is 35 per cent, while at Cboe, it is 40 per cent, reflecting the crypto-curreny’s volatility. The margin for an S&P 500 futures contract, by contrast, is just five per cent, analysts said.