Bitcoin futures market heats up

26 September 2019

Bitcoin futures have been trading for almost two years now – but the marketplace for those trades has been a relatively quiet one.

Both the derivatives marketplace CME Group and the Chicago Board Options Exchange (CBOE) introduced rival futures products in December 2017. Yet after a tepid uptake, CBOE abruptly announced it would be discontinuing its Bitcoin futures contracts at the start of this year, leaving CME as the sole Bitcoin futures provider in the US.

That market domination was eroded this week when the Intercontinental Exchange (Ice) announced the arrival of its own bitcoin futures contracts. Launched by the Ice-backed venture Bakkt, these new futures contracts include one fundamental difference from the product on offer at CME: Bakkt futures will be physically deliverable and pay out in Bitcoin upon settlement. By contrast, CME Bitcoin futures pay out in cash.

Bakkt futures are also designed to give traders and fund managers additional peace-of-mind in knowing their payment channels and secure guarantees are received and delivered through the federally regulated Ice clearinghouse. Crypto tokens are then stored in an Ice-protected warehouse using the same security systems deployed to safeguard the New York Stock Exchange (NYSE).

According to Bakkt CEO Kelly Loeffler, it’s only by leveraging this trust on the trading floor that uptake will increase and cryptocurrencies will continue to become more and more mainstream.

“We have taken an important step toward bringing trusted infrastructure to digital assets,” she wrote in a blog post celebrating this week’s futures launch.

“As institutions enter this emerging asset class, they will continue to look to secure infrastructure and the regulatory certainty that it provides. Importantly, these futures contracts now serve as benchmarks established by a trusted price discovery process upon which investors can rely.”

In the wake of Bakkt’s market entry, competitor CME isn’t resting on its laurels. In a supposedly unrelated move, the group announced last week plans to start offering options on its Bitcoin futures contracts by the first quarter of 2020.

While Bitcoin has received plenty of press for its recent volatility, there does appear to be a sizeable willingness among investors to take on crypto-powered derivatives. There are already around 3,300 individual accounts trading Bitcoin futures at the CME – amounting to about 7,000 of the group’s 4.3m daily trades. Since launch in December 2017, the group has overseen 20 successful futures expiration settlements.

With the added benefit of options, contracts can be settled into actively traded futures and traders will subsequently be able to mitigate the risk of counterparty default through central clearing.

“Based on increasing client demand and robust growth in our Bitcoin futures markets, we believe the launch of options will provide our clients with additional flexibility to trade and hedge their bitcoin price risk," Tim McCourt, CME Group Global Head of Equity Index and Alternative Investment Products, said in a statement.

“These new products are designed to help institutions and professional traders to manage spot market bitcoin exposure, as well as hedge Bitcoin futures positions in a regulated exchange environment.”

CME’s anticipated options launch at the start of next year is dependent upon regulatory approval, and government bodies have admittedly been a bit sluggish in assessing the rapid changes in the crypto sector as well as the ways in which they can or should be traded.

For example, because US authorities continue to operate based upon the assumption that cryptos like Bitcoin are commodities, the CFTC doesn’t allow spot contracts on crypto trades. Yet as CME, ICE and others begin to rollout new Bitcoin-linked products – particularly products that offer external legitimacy via existing federal regulation – advocates hope marketplace growth will eventually lead to cryptocurrencies being granted their own asset class.

“We’re starting with the basics: instilling trust through regulation and secure custody, and deploying products that are transparent and regulated to support their adoption,” Bakkt's Loeffler said.

“Our team is excited to deliver on this mission, and the early results are tangible today. With the launch of fully regulated infrastructure for bitcoin now complete, we will continue our work to strengthen and deliver on the potential of this new asset class.”

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