Bitcoin futures have started trading on regulated exchanges in America as of Sunday, and their European counterparts are watching to see how things play out across the Atlantic before launching cryptocurrency derivatives of their own.
Investors across the world can now turn to the Chicago Board Options Exchange (CBOE) and soon the Chicago Mercantile Exchange (CME), the world’s largest derivatives exchange, to speculate on the future value of bitcoin through futures, much like they would with traditional currencies or commodities.
European investors are allowed to engage in the new trades on the CBOE and CME thanks to financial equivalence rules between the EU and the United States, but several European exchanges are themselves considering listing similar products.
“We’re taking a very close look at bitcoin and other cryptocurrencies that are equally interesting. We think there are advantages to such an innovative asset class, but potential issues like the unregulated currency spot market and high volatility,” said a spokesperson for Eurex, a German derivatives exchange with ties to Deutsche Börse.
“As a fully regulated exchange, we need to address these risks before launching products. But, if the client demand is there, we will tackle these challenges.”
But not all exchanges are quite so gung-ho on the new asset class.
“We don’t plan to launch bitcoin futures, as our mission is to channel savings and investments into the financing of the real economy,” said a spokesperson from Euronext, a stocks and derivatives exchange based in Amsterdam and which handles trading in the Netherlands, Belgium, France, the UK, and Portugal.
London’s Intercontinental Exchange (ICE), the world’s third largest derivatives exchange, said that the exchange had no immediate plans to launch bitcoin futures but was closely following developments in the US, while LCH, a major derivatives clearinghouse based in London, declined to comment.
“It didn’t seem obvious to rush out a product and settle against a index on a lot of exchanges that are not particularly transparent. But we may be stupid for not being first here,” said ICE’s chief executive, Jeff Sprecher, at a financial services conference hosted by Goldman Sachs this month.
What are bitcoin futures?
Once considered a niche asset, the meteoric rise in the value of bitcoin, which has increased in value by more than 1500% this year, has made the cryptocurrency too attractive for traditional investors to pass up.
Through bitcoin futures, two investors place opposing bets on the price of bitcoin at a designated point in the future. As the price goes up or down, one of the counterparties will have to pay from a brokerage account to cover the gain or loss relative to the agreed future price.
While traditional forward contracts for agricultural goods often involve the delivery of the good in question, bitcoin futures on the CBOE and CME will be merely speculative. Counterparties will not exchange actual bitcoin but the cash value of bitcoin at the agreed settlement date.
Bitcoin futures are considered to be innovative since they will allow holders of bitcoin to protect themselves from the volatile price of bitcoin by “shorting” the currency in a futures contract. In case the value of bitcoin declines, parties who have shorted in a futures contract will reduce their overall loss.
Experts predict that large market players will play play a risk-free arbitrage trade between the spot value of bitcoin and bitcoin futures (known as a “contango” trade), where the premium price of bitcoin futures effectively guarantees that their holders will make a profit.
Supporters also argue that the influx of capital through futures may help to calm the volatility of bitcoin’s price, although it is also expected to moderately increase demand for the cryptocurrency. Bitcoin jumped by around $2,000 on Monday following the opening of the CBOE’s bitcoin futures exchange.
However, there is a substantial chorus of naysayers who think that shepherding volatile cryptocurrency into crucial nodes of the financial system, such as the clearinghouses managed by major derivatives exchanges, will only bring instability.
That view resonates with some at the Europe’s most important derivatives exchanges, who share concerns about bitcoin’s impact on the security of their businesses.
“There is still so much we don’t know. Will authorities in Europe regulate bitcoin as a security or as a currency? Without a question, any kind of financial security linked to bitcoin needs to be handled with caution,” said an executive from one of Europe’s largest exchanges, and who asked not to be identified for the purpose of the article.
Roughly 3,000 bitcoin futures have traded on the CBOE since Sunday, implying fairly low investor interest relative to other futures markets. However, the debut of bitcoin futures on the CME, worth relatively more than their CBOE counterparts, are expected to bring larger inflows of capital into the market when the exchange opens next Monday.