Bitcoin Futures

U.K.-based cryptocurrency exchange Coinfloor has announced that it will be launching a physically settled bitcoin futures next month, making it a first.

Speaking at the Futures Industry Association’s annual conference in Boca Raton, Florida, Mark Lamb, co-founder of Coinfloor, said to Reuters that:

When you talk to the liquidity providers, they all say the same thing, which is they want a physically delivered futures contract so they can hedge their exposure across exchanges.

In December, Chicago-based registered exchange CME Group Inc and Cboe Global Markets Inc started offering exposure to cryptocurrencies such as bitcoin. Bitmex, CryptoFacilities also offer bitcoin futures, whereas Wall Street investment firm Cantor Fitzgerald self-certified a new contract for binary options tied to bitcoin, as announced by the U.S. Commodities Futures Trading Commission (CFTC). This makes Coinfloor, at least, the sixth company to list a product offering exposure to digital currencies.

However, unlike the aforementioned organisations, which deliver cash settled contracts, Coinfloor will be providing physically settled contracts. This means that when the contract expires, the asset that is being traded – bitcoin – will be delivered.

According to Lamb, there has been cause for concern among investors and large proprietary trading firms regarding cash settlements, with many believing that they can easily be manipulated. He is of the opinion that individuals may try to move the price of the indexes or auctions on spot exchanges that set futures prices in their favour.

After the first day of trading for the Cboe exchange in December, the platform saw the price of bitcoin jump in value by $1,000, pushing the price of one coin to above $17,000.

However, the idea of bitcoin futures is still looked at with some concern. In response, in January, J. Christopher Giancarlo, the chair of the CFTC, announced that the regulator would be developing a ‘heightened review‘ process for how cryptocurrency derivatives, such as bitcoin futures, come to the market.

The regulator has also come under fire in the past from the Futures Industry Association (FIA) for allegedly not consulting with the organisation regarding the CME and Cboe product launches. According to the FIA, the agency rushed through the process by permitting the exchanges to ‘self-certify‘ their bitcoin futures contracts.

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The US Securities and Exchange Commission (SEC) has thrown cold water on exchange-traded fund (ETF) providers jockeying to list the first bitcoin ETF.

Thought to be a game-changer for cryptocurrency adoption, bitcoin ETFs would provide investors with the ability to obtain exposure to the flagship cryptocurrency through a conventionally-wrapped investment product.

Fund providers have sought SEC approval for cryptocurrency-derived ETFs for years, but the SEC has been reluctant to lend its approval to these products, which would likely be popular among retail investors.

The rush to list a bitcoin ETF intensified following the launch of the first bitcoin futures contracts, as the general consensus among analysts was that the SEC would quickly approve a fund that invested exclusively in futures contracts, which currently trade on two regulated US exchanges.

However, several recent developments indicate that this may not be the case.

Most recently, the SEC sent two investment industry trade groups a lengthy letter outlining a number of “significant investor protection issues” that fund sponsors must answer before the agency will consider approving a bitcoin ETF.

“We believe…that there are a number of significant investor protection issues that need to be examined before sponsors begin offering these funds to retail investors,” Dalia Blass, director of investment management at the SEC, wrote in the letter, which was dated Jan. 18.

Blass said that the SEC was chiefly concerned about the liquidity of the futures markets, as well as how to assign a fair market value to what would be intensely-volatile products. However, she also touched on a variety of other topics, including market manipulation, custodial issues, and arbitrage.

“[T]he innovative nature of cryptocurrencies and related products, as well as their expected use and utility in our financial markets, means that they are, in many ways, unlike the types of investments that registered funds currently hold in substantial amounts. In light of these considerations, we have, at this time, significant outstanding questions concerning how funds holding substantial amounts of cryptocurrencies and related products would satisfy” federal securities laws, Blass said.

Earlier this month, the SEC reportedly asked fund providers to voluntarily withdraw their bitcoin ETF applications, citing some of the concerns outlined in the letter above.

Notably, the agency also pressured the first blockchain-focused funds to remove the word “blockchain” from their names, although these ETFs — which primarily invest in companies experimenting with blockchain technology — were allowed to begin trading this week after complying with this request.

Featured Image from SEC/Flickr

The U.S. Commodity Futures Trading Commission (CFTC) proposed regulations that will curb unlicensed bitcoin futures trading within the country.

The proposed regulations, announced by the CFTC on Friday, explicitly place bitcoin and other cryptocurrencies under the framework for “actual delivery” that currently governs the purchase of physical commodities such as gold and oil.

Under this framework, exchanges and traders must demonstrate an ability to physically deliver the commodities to their owners within 28 days of purchase. Otherwise, the purchase constitutes a futures contract and is subject to a litany of other regulations governing futures trading.

The full text of the proposed regulatory language has been reproduced below

(1) a customer having the ability to: (i) take possession and control of the entire quantity of the commodity, whether it was purchased on margin, or using leverage, or any other financing arrangement, and (ii) use it freely in commerce (both within and away from any particular platform) no later than 28 days from the date of the transaction; and

(2) the offeror and counterparty seller (including any of their respective affiliates or other persons acting in concert with the offeror or counterparty seller on a similar basis) not retaining any interest in or control over any of the commodity purchased on margin, leverage, or other financing arrangement at the expiration of 28 days from the date of the transaction.

The key point in the proposed language is that the seller may not retain “any interest in or control over any of the commodity” for more than 28 days following the date of the transactions. According to a 23-page document (PDF) accompanying the proposed regulations, this includes exchange-controlled deposit wallets where the trading platform operators — not the traders — retain control of the private keys.

Although the CFTC has long classified bitcoin as a commodity, the physical delivery provision was a thorny issue for cryptocurrency market participants because bitcoin does not exist as a physical entity.

Last year, the CFTC reached a $75,000 settlement with overseas exchange Bitfinex after the commission found that the exchange continued to hold the purchased bitcoins in exchange-controlled wallets after the actual delivery exception expiration date.

The Bitfinex case highlights an important point regarding the extent of the commission’s jurisdiction. The regulations would not just apply to U.S.-based exchanges, but also foreign trading platforms that provide services to Americans. Consequently, this regulatory guidance could lead overseas exchanges that offer margin trading to further restrict access to U.S. residents.

The CFTC will accept public comments on the proposed bitcoin regulations for 90 days, a period that will commence following their publication in the Federal Register.

bitcoin

Bitcoin successfully weathered its first day on Wall Street, defying the apocalyptic predictions of bitcoin skeptics, many of whom have been quite vocal in their criticism of bitcoin’s rise and the launch of bitcoin futures contracts.

Though described by some professional traders as “one of the greatest shorting opportunities ever,” CBOE’s bitcoin futures actually rose in price during their first 24 hours of trading. Consequently, it appears that bears are unwilling to put their wallets where their mouths are — at least for now.

At the time of writing, January futures were priced at $17,900, indicating that traders believe bitcoin’s rise will continue — albeit at a much slower pace — into the new year. Bitcoin’s spot price is currently $16,819, according to the BlockExplorer Bitcoin Price Index.

cboe futures
Source: CNBC

Volume was thin compared to other assets — and it was little more than a drop in the bucket compared to the $13 billion traded on bitcoin exchanges during the same period — but it nevertheless exceeded $50 million, which is more than what many analysts expected to see, especially considering that many major banks have not yet provided clients with access to bitcoin futures products.  However, that may change, especially once fellow U.S. derivatives exchange CME begins trading bitcoin futures on December 18.

Though similarly structured, CME’s contracts will have some notable differences from of those of CBOE.

While CBOE contracts represent one bitcoin each, CME’s will constitute five. Consequently, CME’s contracts will likely keep many retail investors out of the marketplace because of present exchange rates — even with leverage.

Additionally, CME’s bitcoin price will be based on a proprietary spot price that includes data from multiple exchanges. CBOE’s is based solely on Gemini’s daily auction price. This could lead to price gaps between the two exchanges.

Finally, CME is much larger than CBOE and will likely attract more volume from institutional investors, meaning that the CME launch will provide a fuller picture of where Wall Street believes bitcoin is headed in the short-term future.

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Bitcoin Futures

Cboe Global Markets Inc. revealed today that it is to begin its bitcoin futures trading on the 10th December, beating fellow Chicago-based CME Group at becoming the first regulated exchange to trade the digital currency.

After receiving approval from the U.S. Commodities Futures Trading Commission (CTFC), in a press release, Ed Tilly, Chairman and Chief Executive Officer of Cboe Global Markets, said:

Given the unprecedented interest in bitcoin, it’s vital we provide clients the trading tools to help them express their views and hedge their exposure. We are committed to encouraging fairness and liquidity in the bitcoin market. To promote this, we will initially offer XBT futures trading for free.

Bitcoin Futures Exchanges are coming in the near future

Similar to CME, Cboe’s bitcoin futures will be cash-settled; however, they will be based on the Gemini Trust, the digital currency exchange founded by Cameron and Tyler Winklevoss. On the other hand, CME will base their prices on four cryptocurrency exchanges, including Kraken, itBit, Bitstamp, and GDAX.

According to the release, trading will commence at 5:00 p.m. central time on Sunday, and Monday, 11th December, will be the first full day of trading. Through December, trading will be free, the release adds.

In a race to offer bitcoin derivative products via major exchanges, Terry Duffy, CME Group Chairman and CEO, revealed at the beginning of the month that it is to start trading on the 18th December.

At the time, Duffy said:

We are pleased to bring Bitcoin futures to market after working closely with the CFTC and market participants to design a regulated offering that will provide investors with transparency, price discovery, and risk transfer capabilities.

The news of Cboe and CME receiving approval from the CFTC means that it could attract more investors to the digital currency market. Not only that, but it will be a step closer to legitimising the cryptocurrency, which is often linked to criminal activities.

Furthermore, at present, bitcoin is bought and sold on exchanges that remain unregulated. Many, however, feel uncomfortable with this despite the fact that market prices are continuing to soar to record highs.

Just last week, billionaire investor Mark Cuban stated that the approval of the bitcoin futures on major exchanges will be seen as ‘generally positive‘ on the digital currency, stating:

What they charge is critical. Transaction costs are relatively high for BTC. If this pushes transaction costs lower, it will be a benefit to the BTC market.

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