Bitcoin Climbs as Futures Debut Fails to Incite Attack by Shorts

Updated on
  • CME derivative broadens market further for digital currency
  • Settlement terms challenge short bets; basis risk seen

CME Launches Bitcoin Futures

The arrival of a new futures contract that makes it easier to place short bets on bitcoin wasn’t enough to undercut the cryptocurrency’s march toward $20,000.

The digital token, up about 20-fold this year, added another 4.8 percent from its New York close on Friday to $18,379 as of 9:24 local time, according to prices on Bloomberg. That was in line with its new contract for January delivery, which at $18,650.

Bitcoin touched a record $19,511 just minutes before CME Group Inc. began offering futures Sunday evening in a move that broadens the market for institutional traders and makes it easier to sell the cryptocurrency short.

Still, impediments remain to betting on a dive. The Chicago-based futures exchange, the world’s biggest, required a 47 percent initial margin, or almost $50,000, for opening trades on a five-bitcoin future. Settlement terms are spurring some participants to question whether futures will move fully in line with the underlying asset.

“In theory, it does open it up to shorting opportunities, but as always, the devil is in the detail,” said Jeremy Goldwyn, a managing director at Hong Kong-based commodities and financial futures brokerage Bands Financial Ltd. “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.”

The CME contract, like the futures offered by Chicago-based rival Cboe Global Markets Inc. a week ago, requires cash settlement against a CME-fixed reference price on expiration. That’s in contrast to settling with physical delivery of bitcoin, which might allow a trader to lock in their upside exposure. The future is based off four price sources.

Basis Risk

“People have to be comfortable with the reference price of the contract, and there may be a basis risk,” Goldwyn said, referring to the potential for non-synchronized price movements.

The contract also limits the minimum price fluctuation to $25.

Even so, the CME debut was carried out smoothly, with the contract’s volatility staying below its circuit-breaker thresholds. The Cboe contract was hit with trading pauses on the first day.

Of course, potential shorts may just be nervous about getting caught on the wrong side of 2017’s hottest asset. It’s up almost 2,000 percent this year, with no sign that the parabolic rise is coming to an end.

“Futures have definitely opened bitcoin up to shorting opportunities,” said John Butler, head of wealth services for Toronto-based GoldMoney Inc., which offers bitcoin and gold custodian and storage services. “But shorting something with this much momentum would be brave.”

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