CBOE Bitcoin Futures Trading Launches Successfully – What’s Next?

Beating CME Group to the punch, which launches its bitcoin futures next week, CBOE (Chicago Board Options Exchange) will launch its much anticipated bitcoin futures contract on Sunday. Futures contract adds the ability to go long or short on bitcoin, in addition to attracting institutional investors to the market.

Located at 400 South LaSalle Street in Chicago and owned by Cboe Global Markets, CBOE is the largest U.S. options exchange, offering options on over 2,200 companies, 22 stock indices, and 140 exchange-traded funds (ETFs).

What Is A Futures Contract?

A futures contract is an agreement to buy or sell a particular commodity at a predetermined price at a specified time in the future.

Let's say Alice thinks commodity COM, which is trading at $100 will rise to $200 in a month. She can agree to buy COM from Bob for $150 in a month's time. If she is right, she could end up paying $150 for a commodity which is worth $200 and take a $50 profit.

Bitcoin futures contract will be settled in cash, meaning that no actual bitcoins will ever be involved. Payments will be made in fiat for the difference of price from what's contractually agreed.

Stop-Loss Order Paramount

In less than 4 weeks, Bitcoin has gone from trading as low as $5,584 to as high as $18,493 and even in excess of $22,000 value in some exchanges.

This kind of wild volatility makes the future a high-risk contract. A stop-loss order is therefore paramount to make the contract somewhat practicable and less of a nightmare for clearing houses.

Liquidity And Manipulation Concerns Over Gemini

CBOE is basing its bitcoin futures contract on pricing on Gemini, the cryptocurrency exchange founded by the Winklevoss twins. A number of concerns hang over Gemini including low volumes on the exchange and system outages.

According to CoinMarketCap, the exchange sees only 1% of trading volume in the bitcoin market. Some trading firms have expressed concerns over an entire market for futures being based on data from one exchange with thin volumes as it raises questions of liquidity and liability to market manipulation.

“I'm concerned that the Gemini auctions often have very low volume and the lack of liquidity may lead to the futures settling at a price that is not indicative of where bitcoin is trading on other venues, due to the localized supply/demand imbalance in the auction,” said Garrett See, the CEO of DV Chain, the cryptocurrency trading arm of Chicago-based DV Trading.

John Spallanzani, the chief macro strategist at GFI Group, noted the risk of market manipulation, “The lower the volumes, the easier to manipulate. Since the volume is low and bitcoin is unregulated it is conceivable. The last thing we want is another Libor-type scandal.”

Libor is the scandal in which banks rigged the price of the London Interbank Offered Rate to benefit their positions in the derivatives market. Banks have been fined billions of dollars for manipulating the rate, which provided the base for a loan market worth a $300 billion.

A Double-Edged Sword

One of the major upshots of being an unregulated market operating on largely unregistered exchanges is the possibility that it could all just be a long con. Most high-volume exchanges lack even basic oversight, much less carry out third-party audits. So if it is a con, we may only find out when it all comes crashing down.

“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 someone decided bitcoin was worthless, it would be worthless, and I'm not sure whether people have really thought that one through,” he said.

Banks To Play Spoilsport

According to The Wall Street Journal, JPMorgan Chase & Co., Bank of America Merrill Lynch, Citigroup Inc. and Royal Bank of Canada are telling customers that they won’t offer them access to the first bitcoin futures market when it goes live Sunday. Goldman Sachs said it would clear futures contracts for certain clients, and is also considering whether to become a market maker to help build liquidity.

Futures brokers fear that they will bear the brunt of the risk associated with bitcoin futures, because the margin that backstops the contract is placed in a clearing house. Clearing houses stand between two parties in a futures trade, managing the risk to the rest of the market if one side should default. They are mutually funded in part by banks to guard against the failure of their largest members.

Banks are worried about managing the risk associated with the contracts, particularly given the manic swings seen in recent weeks.

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