Investors, clearing organizations brace themselves for cryptocurrency risks
The newest way to bet on Bitcoin, the cryptocurrency that has recently taken Wall Street by storm with its stratospheric price rise and wild daily gyrations, arrived on Sunday when Bitcoin futures started trading.
The first Bitcoin futures were set to kick off at 6 p.m. (U.S. Time) on Cboe Global Markets Inc's Cboe Futures Exchange.
The launch has given an extra kick to the cryptocurrency's scorching run this year.
It has nearly doubled in price since the start of December, but recent days saw sharp moves in both directions, with Bitcoin losing almost a fifth of its value on Friday after surging more than 40 percent in the previous 48 hours.
But while some market participants are excited about a regulated way to bet on or hedge against moves in Bitcoin, others 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 dollars on the Gemini Exchange, 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 at Charles Schwab in Austin, Texas.
Bitcoin fans appear excited about the prospect of an exchange-listed and regulated product as well as the ability to bet on its price swings without having to sign up for a digital wallet.
The futures are an alternative to a largely unregulated spot market underpinned by cryptocurrency exchanges that have been plagued by cybersecurity and fraud issues.
"You are going to open up the market to a whole lot of people who aren't currently in Bitcoin," Frederick said.
The futures launch has so far received a mixed reception from big U.S. banks and brokerages.
Interactive Brokers was planning to offer its customers access to the first Bitcoin futures when trading went live, but to bar clients from assuming short positions, holding margin requirements of at least 50 percent.
Several online brokerages including Charles Schwab and TD Ameritrade did not allow the trading of the newly launched futures on day one.
Some of the big U.S. banks, including JPMorgan Chase and Citigroup, did not immediately clear Bitcoin trades for clients, as the Financial Times said would happen in a report published on Friday.
Goldman Sachs Group Inc on Thursday said it was planning to clear Bitcoin futures for certain clients.
Bitcoin's manic run-up this year has boosted volatility far in excess of other asset classes. The launch of futures 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 of Los Angeles-based Capital Market Laboratories.