The newest way to bet on bitcoin will arrive on Sunday, when futures of the cryptocurrency that has taken Wall Street by a storm begin trading. The first bitcoin future trades are set to kick off at 6 pm EST (2300 GMT) on CBOE Global Markets Inc's CBOE Futures Exchange.
This has given an extra kick to the cryptocurrency's scorching run this year. Bitcoin's price soared so far this month, but it has made sharp moves in both directions in recent days, falling by almost a fifth on Friday after surging more than 40 percent in the previous 48 hours.
On Sunday, bitcoin was up about 3 percent at $15,000 on the Luxembourg-based Bitstamp exchange. On the Gemini Exchange, it was at $15,650. Bitcoin fans appear excited about the prospect of an exchange-listed and regulated product and the ability to bet on its price swings without having to sign up for a digital wallet. Others, however, caution that risks remain for investors and possibly even the clearing organizations underpinning the trades.
The futures are cash-settled contracts based on the auction price of bitcoin in US dollars on the Gemini Exchange, which is owned and operated by virtual currency entrepreneurs Cameron and Tyler Winklevoss.
"The pretty sharp rise we have seen in bitcoin in just the last couple of weeks has probably been driven by optimism ahead of the futures launch," said Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin, Texas. "You are going to open up the market to a whole lot of people who aren't currently in bitcoin," Frederick said.
The futures are an alternative to a largely unregulated spot market underpinned by cryptocurrency exchanges that have been plagued by cybersecurity and fraud issues. The launch has so far received a mixed reception from big US banks and brokerages, though. Interactive Brokers Group Inc plans to offer its customers access to the first bitcoin futures when trading goes live but will bar clients from assuming short positions and has margin requirements of at least 50 percent.
Several online brokerages, including Charles Schwab Corp and TD Ameritrade Holding Corp, will not allow trading of the new futures immediately.
J.P. Morgan Chase & Co, Citigroup Inc and other large US banks will not immediately clear bitcoin trades for clients, the Financial Times reported on Friday. Goldman Sachs Group Inc said on Thursday it was planning to clear such trades for certain clients. Bitcoin's manic run-up this year has boosted volatility far in excess of other asset classes. The futures trading may help dampen some of the sharp moves, analysts said.
"Hypothetically, volatility over the long run should drop after institutions get involved," said Ophir Gottlieb, chief executive officer of Los Angeles-based Capital Market Laboratories. "But there may not be an immediate impact, say in the first month."
Placing futures on an underlying spot market can lend more order to spot trading in the long run by helping to determine the proper price of a security and by allowing investors to express both bullish and bearish biases, said J.J. Kinahan, chief market strategist at TD Ameritrade in Chicago.
Analysts warn, however, against trying to predict how the futures will perform, given that bitcoin is unlike any other asset. "This is completely unknown territory," said Charles Schwab's Frederick. Bitcoin's meteoric price rise has raised worries that it could collapse soon, although analysts have little concern that this could hurt broader financial markets because the cryptocurrency lacks correlation with other risky assets and is held and traded largely outside the banking sector.
However, there are still fears of inaccurate pricing and systemic risk to clearing houses, should prices move sharply and clients fail to meet margin calls. Brokers have called for more safeguards to protect against bitcoin's high volatility.
The risk that investors might manipulate the underlying spot market to benefit in the futures market is another big concern. "Large equity indexes show some volatility around cash settlements, and those are in highly liquid, highly regulated venues," said Steve Sosnick, chief options strategist at Interactive Brokers in Greenwich, Connecticut. "Compare that to cash settlement in bitcoin, and there is a lot more uncertainty on how that would play out."
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