Bit­coin to start fu­tures trad­ing as surge stokes Wild West wor­ries

As vol­umes in­crease, there are also ques­tions about the ro­bust­ness of the tech­nol­ogy at bit­coin ex­changes

Gulf News - - Markets -

Bit­coin fans are sali­vat­ing over the po­ten­tial of lon­gawaited le­git­i­macy for the cryp­tocur­rency when fu­tures trad­ing launches this week­end, but ex­perts worry the risks as­so­ci­ated with bit­coin’s Wild West­like na­ture could over­shadow the de­but.

The first bit­coin fu­ture trades kick off Sun­day at 6pm EST (2300 GMT) on Cboe Global Mar­kets Inc’s Cboe Fu­tures Ex­change, fol­lowed a week later by CME Group Inc’s CME.

Nas­daq Inc plans to get into the mix next year, Reuters re­ported.

While Cboe, CME and Nas­daq of­fer strictly po­liced trad­ing en­vi­ron­ments, the un­der­ly­ing bit­coin mar­ket is rid­dled with crypto-ex­changes lack­ing even ba­sic over­sight.

That has stoked fears of mar­ket ma­nip­u­la­tion, in­ac­cu­rate pric­ing, and sys­temic risk to clear­ing houses.

“I’m kind of taken aback by what’s hap­pened in the last three months,” said Richard John­son, an an­a­lyst at Green­wich As­so­ciates who owns digital cur­ren­cies and con­sid­ers him­self a bit­coin bull. “I’m con­cerned things are mov­ing a bit too quickly.” Bit­coin’s more than 10-fold up­surge this year has led to warn­ings of a bub­ble by the likes of JPMor­gan Chase & Co Chief Ex­ec­u­tive Of­fi­cer Jamie Di­mon, who called it “a fraud” that will even­tu­ally blow up. Oth­ers, like Wall Street ad­viser Tom Lee, ex­pect bit­coin to top $100,000 (Dh367,000).

Daily price change

On Wed­nes­day, its hy­per­volatil­ity was on full dis­play as it broke through $13,000 for the first time on the Lux­em­bourg­based Bit­stamp ex­change, jump­ing more than 11 per cent on the day. Since Au­gust 2011, bit­coin has av­er­aged a daily price change of nearly 3 per cent, up or down, com­pared with a daily av­er­age change in the US dol­lareuro cross rate of less than 0.5 per cent since the euro’s de­but in 1999.

“Maybe it’s just the most unique mar­ket that is go­ing to con­tinue to go up for­ever and ever and so every­body on the long side is go­ing to make money and it’s a great thing, but I’ve been around long enough to know that’s not go­ing to work out so well,” said John Loth­ian, CEO of ad­vi­sory firm John J Loth­ian and Com­pany.

As a vir­tual cur­rency, bit­coin can be used to move money around the world without the need for a cen­tral au­thor­ity, such as a bank or gov­ern­ment, which is a dou­ble-edged sword, said Steve Grob, di­rec­tor of group strat­egy at Fidessa.

“There is no back­stop. If sud­denly to­mor­row every­one de­cided bit­coin was worth­less, it would be worth­less, and I’m not sure whether peo­ple have re­ally thought that one through,” he said. If the fu­tures mar­ket were to ex­ceed the size of the spot mar­ket, with cur­rent daily trad­ing vol­ume of around $6 bil­lion per day, the un­der­ly­ing price could be more sus­cep­ti­ble to ma­nip­u­la­tion, said Kevin Zhou, co­founder of crypto cur­rency fund Galois Cap­i­tal.

“You’ve seen these prob­lems be­fore in bit­coin fu­tures, where right be­fore the set­tle­ment, the price pegs it high or low and then bounces back right after,” he said.

As vol­umes in­crease, there are also ques­tions about the ro­bust­ness of the tech­nol­ogy at bit­coin ex­changes, Loth­ian said.

“Par­tic­u­larly when you’re Tra­di­tional banks re­main scep­ti­cal of deal­ing with bit­coin ex­changes. Ear­lier this year, Wells Fargo & Co stopped pro­cess­ing wire trans­fers for an ex­change called Bitfinex, leav­ing cus­tomers un­able to trans­fer US dol­lars out of their ac­counts, ex­cept through spe­cial ar­range­ment with the ex­change’s lawyer.

Still, new en­trants, from re­tail in­vestors to high-fre­quency traders, have piled into bit­coin. US-based cryp­toex­change Coin­base said it added 100,000 ac­counts in the three days around the US Thanks­giv­ing hol­i­day, for 13.1 mil­lion over­all. talk­ing about a high-fre­quency ap­proach to this where peo­ple are try­ing to arb mul­ti­ple ex­changes.” Last month, the Gem­ini bit­coin ex­change, which will set the price for Cboe’s fu­tures con­tract, and GDAX and Kraken, two of the four ex­changes in CME’s bit­coin in­dex, had sys­tems is­sues.

Im­pact on ca­pac­ity

“Ev­ery sin­gle bit­coin ex­change re­ceives and is re­ceiv­ing com­plaints by users due to the un­be­liev­ably surg­ing bit­coin price and the re­sult that has on ca­pac­ity,” Christina Yee, a Kraken rep­re­sen­ta­tive, re­cently told Reuters in an email.

Kraken is plan­ning to launch a new trade engine “soon” which should in­crease the ex­change’s ca­pac­ity, Yee said. The volatile na­ture of bit­coin could also present a risk to clear­ing houses, said Thomas Peterffy, CEO of In­ter­ac­tive Bro­kers Group Inc.

Clear­ing houses act as mid­dle­men be­tween the par­ties to fu­tures trans­ac­tions. If there were a wild price swing in bit­coin and a smaller bro­ker­age failed to meet its mar­gin call, the clear­ing house would have to take over the po­si­tion, fur­ther mov­ing the price of bit­coin, which could cause other bro­kers to fail, Peterffy said.

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