Category Archives: CBOE

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CBOE President Says ICO “Reckoning” Due

The president of the Chicago Board Options Exchange (CBOE), Chris Concannon, says coming Securities and Exchange Commission (SEC) regulations for initial coin offerings (ICOs) will have catastrophic effects for investors and the market. He says “the reckoning will come in two waves” and “it should be keeping investors up at night”.

CBOE is the largest options exchange in the United States which facilitates the trading of over 1 billion contracts per year for 2,200 companies, 22 stock indices, and 140 exchange-traded funds. It was one of the first places to offer Bitcoin futures contract trading, so has expertise in the cryptocurrency world, while Chris Concannon is well known as a prominent cryptocurrency advocate on Wall Street.

Recent statements from the SEC indicate that most ICOs will be regulated as securities and must have proper clearance and licensing from the SEC in order to legally operate. Basically, any cryptocurrency that is created and sold for profit by an individual or organization, where investors expect a return on their investment, will be considered a security.

Concannon expects the SEC to take legal action against individuals and organizations conducting and investing in ICOs, and indeed this has already started with dozens of cryptocurrency firms subpoenaed this year. There will be severe consequences for anyone trading and propagating securities without a license. It is possible that the SEC could take retroactive legal action since security laws have been in place the entire time and, therefore, most of the ICOs in history have illegally raised funds by selling unregistered securities.

The result of this storm of lawsuits would be that ICOs considered unregistered securities could lose all of their value, which would cause investors to start suing each other and ICO teams for selling unregistered securities in an attempt to recover losses. A professor at Cornell University, Robert Hockett, said these lawsuits would have merit.

Between USD 5 billion and USD 7 billion has been raised by ICOs this year, and now the SEC will go through all these ICOs and decide which ones will be allowed to continue. This might be the beginning of the end for a lot of cryptocurrencies that were sold via ICO to United States citizens. As Concannon forecasts, there could be heavy legal consequences for many cryptocurrency investors, traders, and developers, as well as a significant negative impact on the overall diversity and market cap of the cryptocurrency market.

ICOs won’t be totally banned in the United States; perhaps some will successfully get SEC permission. This would require expenditure for fees and lawyers though, so ICOs will only be feasible for those with significant funding. Even worse, the SEC will be able to manipulate ICOs to change their platforms before granting permission, giving the government strong control over the evolution of blockchain platforms.

 

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CBOE Considering Ethereum Futures After SEC Decision

The President of the Chicago Board Options Exchange (CBOE), Chris Concannon says Ethereum futures could be available soon, following a decision from the Securities and Exchange Commission (SEC) that Ethereum won’t be regulated as a security.

The CBOE President says this decision gets rid of a major stumbling block that was hindering the path towards legally operating an Ethereum futures exchange, and that he is pleased with the SEC for making this clarification. Apparently, CBOE has been thinking about offering Ethereum futures trading since it first launched its Bitcoin futures exchange in December 2017. Bitcoin and Ethereum are the top 2 cryptocurrencies with market caps of 112 billion USD and 50 billion USD respectively as of this writing, 57% of the total cryptocurrency market cap of 281 billion USD.

The SEC provided some guidance for when cryptocurrencies can be defined as securities and when they do not meet the criteria. The Director of the Division of Corporate Finance at the SEC, William Hinman, said that any cryptocurrency which is sufficiently decentralized so no individual or organization is controlling it wont be considered a security. He explicitly stated that Ethereum is not a security and therefore is not under the jurisdiction of the SEC, making Bitcoin and Ethereum the only cryptocurrencies that have been given an all-clear by the SEC.

Ethereum prices rose from 480 USD to 520 USD following the SEC decision, and have since leveled off near 500 USD. The SEC decision is very positive news for the cryptocurrency world since now individuals and exchanges can trade Ethereum in the United States without an SEC broker-dealer license.

Bitcoin futures have been popular among institutional investment firms like Susquehanna International Group and may provide an avenue for institutional money to enter the Ethereum market. However, there is some concern that Bitcoin futures contract trading has damaged the market via manipulation, and that this same sort of manipulation could become an issue for the Ethereum market.

Bitcoin futures contracts can be used to short sell the market, where investors bet on the market going down and get more profit the lower the market goes. Thomas Lee from Fundstrat Global Advisors says investors might be selling lots of Bitcoin to crash the price in order to increase profits from their short positions. If this is true then the same sort of damaging manipulation would be possible on the Ethereum market after future contracts launch on CBOE.

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Bitcoin Futures Contracts Expiration Possible Cause of Market Volatility

The head of research at Fundstrat Global Advisors, Thomas Lee, says the expiration dates of future contracts may be a cause of market volatility and may be part of the reason Bitcoin’s price slid this past week.

Chicago Board Options Exchange (CBOE) Bitcoin futures contracts for June expired on 13 June 2018, and that same day Bitcoin dropped as low as USD 6,100 on Bitfinex. Lee says that Bitcoin drops on average 18% in the 10 days leading up to monthly futures contract expirations. So far there have been six future contract expiration dates since Bitcoin futures launched on CBOE in December 2017.

There were a couple of exceptions, in February 2018 Bitcoin price went up 15% as the expiration date approached, and in April 2018 Bitcoin’s price went up 16%. Lee says a more general observation is that there is significant price volatility, up or down, around Bitcoin futures contract expiration dates.

Lee found through his analysis that Bitcoin prices generally recover six days following contract expiration. Indeed, Bitcoin has recovered since the 13 June 2018 futures contract expiration from its low of USD 6,100 to USD 6,600 as of this writing, but has a ways to go before getting back to levels near USD 7,500 ten days before the contract expiration.

The possible logic behind Lee’s findings is that an investor who is holding a long Bitcoin position but shorting the futures may sell large amounts of Bitcoins as the expiration date approaches to minimize tracking error. Then the investor may sell all of their remaining Bitcoin, and if it’s a large enough sell it could cause the market to drop, which would increase the investor’s profits from their short position.

Bitcoin has billions of USD of trading volume per day, so it seems unlikely that investors trying to make profits shorting the futures markets would have enough money to drop global Bitcoin price. In any case, the Commodities Futures Trading Commission is investigating Bitcoin exchanges to see if any price manipulation related to futures trading has been occurring.

President and chief operating officer of CBOE Global Markets, Chris Concannon, says that the fall of Bitcoin’s price can be more easily explained by bad news and that the CBOE futures don’t have as much influence on the global Bitcoin market as Lee is saying.

 

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Moody’s, Fitch, S&P: Bitcoin Futures Considered Risky

The top three credit rating agencies, S&P, Moody’s and Fitch, said they consider Bitcoins future exchanges to be risky business, and that banks which clear Bitcoin futures contracts could have their credit rating downgraded if Bitcoin futures trading volume continues to grow.

The credit rating agencies assign letter grades to banks, corporations, and governments to indicate how likely they are to default on debts. The lower a grade a bank has, the harder and more expensive it is for them to obtain loans, limiting the amount of credit they can extend to clients.

Moody’s says Bitcoin futures contract clearing is considered credit negative since it exposes the bank to the volatile Bitcoin market, whether they are directly handling cryptocurrency or not. Volume is not enough to cause a credit rating decrease at this time, but if volume increases enough that will cause an increase of risk that will force agencies to assign a lower grade.

A Bitcoin futures contract is an agreement to buy or sell Bitcoin at a pre-determined price at a specific time in the future. This can be used by traders to manage their risk, since if the market drops they could sell their Bitcoins at a higher fixed rate that was agreed on in the futures contract regardless of how far the market drops.

This mechanism that can help manage risk can be used to profit from shorting the Bitcoin market too. The Bitcoin market has been in a sharp decline since futures contracts launched, making shorting quite profitable, to the point that a federal investigation has been opened up by the Commodities Futures Trading Commission to determine if futures trading has led to manipulation of the Bitcoin market. The initiation of the federal investigation and this announcement from the credit rating agencies regarding Bitcoin futures might be related.

Bitcoin futures contracts were officially launched in December 2017 and are now traded on the Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange (CBOE).  Trading volume of Bitcoin futures contracts has been increasing, with a record USD 670 million of daily volume on 25 April 2018. Futures are primarily traded by institutional investors, so increasing futures volume is a positive sign that institutional investors are putting more money into Bitcoin.

Bitcoin futures contracts are cleared by Options Clearing Corporation for CBOE and Clearport for CME, so this statement from the credit rating agencies is directed at these institutions, but also applies to any institutions that decide to facilitate clearing of Bitcoin futures contracts in the future.

 

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