Category Archives: CME

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CME to Stick With Bitcoin Before Spreading the Field

CME, the world’s largest exchange operator, says that it is in no rush to list more cryptocurrencies to Bitcoin futures trading at this time.

CME Group is the world’s leading and most diverse derivatives marketplace, handling 3 billion contracts worth approximately USD 1 quadrillion annually. The financial giant, which is also the owner of the Dow Jones stock and financial indexes, began offering Bitcoin futures back in December of last year, following CBoE Global Markets Inc similar move.

The group’s CEO, Terry Duffy, says that so far he hasn’t seen huge flows of business, but is happy to take a “wait and see approach”. Competitor CBoE has been trading 5,881 contracts a day in 2018 to CME’s average of 3,063 according to Bloomberg, although the daily average works out to double that of CBoE at 15,317.

Duffy said that in his 40 years in trading that adding Bitcoin futures was a massive step, describing it as possibly the most controversial launch of any product by the company to date. Consequently, the company currently has no plans for any other products in the near future, commenting, “This is going to take some time one way or another and we’ll do it the right way.”

Duffy said he doesn’t want derivatives novices to trade the futures contract “because it is highly volatile and new”. Bitcoin futures now is a minute portion of CME’s business compared to their average daily volume total of 18.4 million contracts in the second quarter of 2018.

CBoE itself has expressed that it would consider opening its doors to other cryptocurrencies in the future and has become a keen player. Its president Chris Concannon expressed a view earlier this year that digital currencies were “here to stay” and that the New York-based exchange had the vision to open a “crypto complex”.

Bitcoin futures trading is fast becoming the next big thing on Wall Street as the introduction of derivatives is increasingly taken on board by major players.

 

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Bitcoin Makes a Mid-Year Leap Forward of 12%

Bitcoin has taken a 12% jump today after last week’s lows and is now trading at USD 6,611 at time of writing.

This will be perceived by many to be the long-awaited upward hit that the digital currency has been waiting for after hitting its lowest level since November last week. Last week’s price was attributed by many to lackluster interest from new buyers due to its recent downward trend. Others cited the expiration of CME futures contracts on 20 June 20, according to MSN.

The rise is on the back of a sustained period of bearishness seeing cryptocurrencies dropping 52% from the beginning of 2018. However, as bears seem to ignore with varying predictions of the demise of the digital currency, Bitcoin still remains up by a massive 145% since the middle of last year, rising 1,300% in 2017.

The rise of altcoins has waned under pressure from cryptocurrency markets’ recent difficulty to maintain any stability, seeing between 800 to 1,000 ICO projects go to the wall, depending on whose version one reads, with genuine ICOs flourishing globally in countries which support blockchain enterprises with enthusiasm.

Regulatory processes have had their effect globally, although many states in the US are integrating blockchain into governmental systems with some innovative projects. Fraudulent ICOs have been met with punitive measures by the SEC which has dampened the ICO market and heightened negative public opinion this year with bad press.

But of course, where there is negativity, there is sure to be a polar opposite, with big guns in the industry making some heart-stopping predictions over the past few months. Tom Lee went for Bitcoin at USD 20,000 by the middle of the year then admitting he’d got it wrong but then sticking with a USD 25,000 value for December 2018. Tim Draper made his “bigger than the internet” comment, predicting the digital currency would be at USD 250,000 by 2022.

It remains to see if Bitcoin has stirred and whether it will begin clawing back some of those gains of 2017 as the year progresses, as the bulls predict.

 

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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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Wall St “Crypto King” Bullish on New Market Jump Start, Needs Clarity

Bart Smith, the head of digital assets at Susquehanna International Group, once crowned “Wall Streets Crypto King” claims that institutional investors will re-stimulate the cryptocurrency market once more regulatory clarity is provided, according to CCN.

Smith, who launched a crypto desk which buys and sells millions of dollars in bitcoin and other cryptocurrencies, asserts that regulatory clarity will allow institutions to be more active in the crypto space, given their distrust of an uncertain market.

“We have a dedicated team of traders and technologists,” he told CNBC. “We’ve been trading bitcoin primarily, but in 2017 as the marketplace expanded, we expanded the number of coins we were trading and the number of exchanges we were providing liquidity on,” adding “We are trading on average a couple hundred million dollars a day [on bitcoin futures] across CME and CFE combined that’s not retail.”

Smith was asked if there was currently a correlation  between the stock markets and cryptocurrency which he felt wasn’t the case:

“We have not seen much correlation at all between the equity and bitcoin markets… Trading cryptocurrencies is way more analogous to other asset classes than you might think from a market maker’s perspective, managing risk and the operational sides of it. But as far as the investor demand for it, and what drives bitcoin and other cryptocurrencies, we have yet to find much analogy in the driver of it.”

On regulation, he maintained that it was the importance and clarity of regulation itself, rather than whether or not there should be any, suggesting “There has been a tremendous amount of focus on the SEC and Chairman Clayton’s comments. But it’s really a whole host of other regulatory agencies out there because the ecosystem expands beyond the traditional financial assets.”

Smith maintains that the future looks bright for cryptocurrencies as he strongly believes in its longevity, and maintains that digital currencies have the potential to change aspects of financial services which will “exist forever.”

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US Regulators Subpoena Coinbase, Kraken and Bitstamp in Bitcoin Probe

The US Commodity Future Trading Commission (CFTC) has subpoenaed Coinbase, Kraken, Bitstamp, and ItBit in an ongoing Bitcoin manipulation probe started last month, reports Coingape.

It is thought that the investigation has been initiated due to the distorted prices in the futures market.

Coinbase is one of the world’s major cryptocurrency exchanges with Kraken in 24th position and a 24-hour trading volume of over 54 million. Bitstamp ranks 38th with 28 million daily trading volume, and ItBit is 62nd with a $9.6 million daily trading volume.

The investigation followed the launch of bitcoin futures on CME Group Inc.’s CME, -0.45%  exchange six months ago. CME’s bitcoin futures derive their final value from prices at these exchanges.  Any kind of manipulative trading in those markets is reported to be able to influence the price of bitcoin futures that the government directly regulates.

The exchanges have been requested to submit their trading data to the CFTC in an attempt to prevent distorted prices in the CME futures market. The Wall Street Journal has said that the problem with CME has existed since it launched Bitcoin futures, requesting data from the exchanges in order to base the bitcoin price for futures trading. CFTC officials had previously backed the launch of bitcoin futures, viewing the move as risky, but worthwhile.

Apparently, CME didn’t have the agreements that allowed trading data sharing, and they had to rely on third-party firms to calculate the index, according to Market Watch. On the regulators search into fake orders and spoofing, Jesse Powell, the Chief Executive of Kraken recently commented:

“If there is any kind of attempted manipulation, whoever is doing it is taking a huge amount of risk for very little possible upside.”

The company behind ItBit exchange, Paxos’ Chief Executive Charles Cascarilla stated that “We have definitely entered an unknown area where it is clear there is a desire for tightened oversight.”

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