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article imageBitcoin futures begin trading on world's biggest exchange

By Ken Hanly     Dec 18, 2017 in Technology
Chicago - The Chicago Mercantile Exchange (CME) the largest in the world began trading bitcoin futures just a week after the rival Chicago Board of Exchange (CBOE) first launched bitcoin futures trading.
CME is a much bigger player in futures than CBOE so many expected its debut would make a bigger splash.
CME launch fast, efficient, and active
As described in a recent Digital Journal article the CBOE launch was paused for a while because of difficulties handling the volume, although overall things went well.
The most active contract in the CME trading traded 221 times in the first hour of trading. CBOE's debut saw their most active contract trade 570 times. However, the CME contracts are worth five times as much as they are based on 5 bitcoins rather than the one of the CBOE.
Bobby Cho, head of trading at Cumberland, the cryptocurrency trading unit of DRW Holding LLC said: “People were better prepared. They knew how they were going to hedge their positions.”
Futures markets bring bitcoin a step further into the financial mainstream
The futures contracts settle in dollars and trade on regulated exchanges. The contracts may be bought by institutional investors who are not allowed to purchase bitcoin directly. BItcoin exchanges are largely unregulated.
Gabor Gurbacs of VanEck Associates Corp. said: “One of the biggest issues when it comes to investing institutionally in digital assets is banks and larger institutions can’t hold an unregulated instrument in their balance sheet, and a futures contract is something they can hold." There are not the same risks as with buying and holding the coin itself.
Jose Nascimento, head cryptocurrency trader at Solidus Capital said: “We were waiting for the launch of the CME futures because the price is more robust and the exchange trades much larger volumes. Futures are a very positive development for the bitcoin market, as it will help everyone from miners to traders hedge risk, and having a price curve will help limit price swings.”
Futures prices and bitcoin price
The futures at CME traded about 2 percent about that of bitcoin's price this morning. CBOE's future prices went as much as 13 percent above that of bitcoin in its first day of trading.
Bitcoin today climbed 9 percent from its Friday New York close reaching a new record over $19,000 as reported in a recent Digital Journal article.
CME exchange has controls on trading
If swings in the rise and fall of prices are too large, trading will pause briefly. Prices will not be allowed to move more than 20 percent. Pausing was not necessary in trading at the CME on its first trading day. It appeared to weather the traffic.
CBOE also has volatility halt measures. They were triggered in the initial hours of their trading as the January contract rose as much as 26 percent.
Some firms hesitant to give customers access to bitcoin futures
TD Ameritrade Holding Corp. did not immediately give its customers access to the bitcoin futures. However the company said on Friday that it would begin offering CBOE's futures starting on Monday.
The company will not offer CME contracts until it demonstrates sufficient liquidity.
JB Mackenzie,. the managing director of futures trading at TD Ameritrade said: “We look at the volume, the open interest and the spreads, and we want to make sure that all those conditions are maturing properly. We have had a lot of customer interest, and we have spent a lot of time educating them as to the differences between the two products.”
Goldman Sachs Group Inc. demanded that some clients set aside collateral that equaled 100 per cent of the value of their trade. Option Clearing has a margin requirement of 44 percent to clear contracts at CBOE. CME demands 47 percent.
Brokerages often have higher requirements than the exchange itself.
Interactive Brokers Group Inc. that claims it handled over 50 percent of trading at CBOE the first day said it required a 50 percent margin on longer investments but for short selling about 240 percent.
Short sellers face expensive trading
The futures exchanges offer short sellers a way of placing short bets on bitcoin but even when the second exchange opened trading the price of bitcoin continued an upward trend in price.
However, the CME futures required a 47 percent initial margin or almost $50,000 on a five-bitcoin future. With the trend still going upward a short seller could end up having to purchase futures at a price higher than they were sold. $50,000 is a reasonably large sum to risk when bitcoin could continue up for some time.
Jeremy Goldwyn of Bands Financial Ltd. a futures brokerage in Hong Kong said: “In theory, it does open it up to shorting opportunities, but as always, the devil is in the detail. I’m not totally convinced that this offers a clear enough link to enable people to play the short side and still reap the financial benefit at settlement.”
Those who might try to bet on the price of bitcoin are no doubt nervous about pouring money into a bet that the price of a hot commodity such as bitcoin will go down. So far there is no sign of that only that the coin makes continual leaps upward often a thousand dollars at a time. Although there can be a decline of a thousand and more it is always short-lived so far. It makes more sense to sell short when there are clear signs of a steep decline that is continuing.
John Butler, head of GoldMoney Inc, a company that offers both bitcoin and gold custodian and storage services said: “Futures have definitely opened bitcoin up to shorting opportunities. But shorting something with this much momentum would be brave."
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