The problem, of course, boils down to Bitcoin’s volatility, something we flagged after the CME announced circuit breakers early last month.
Having taken a gamble on bitcoin futures, which are set to begin trading by the end of the year, the CME is now seeking to avoid the consequences of what has emerged as both the cryptocurrency's best and worst selling point: its unprecedented volatility…While the CME already uses daily vol limits on most other markets, including crude, gold and market futures, to temporarily halt trading when price swings get out of control, the CME has never before dealt with something like bitcoin
In June, Bloomberg showed how Bitcoin’s 30-day volatility had risen to 100%, which was comparable (at the time) with one of the most volatile financial instruments they (and we) could probably think of - a three-times levered ETF in junior gold miners.
The price of Bitcoin (notably, BTC/USD) has been exploding all week basically with the market expecting that with regulated futures contracts, it will bring institutional money into the Crypto market. While that may be true, this futures contract is not exactly a conduit, as it is 'cash settled' which means effectively 'not settled' or 'self-cleared'. CME will match buyers and sellers and not have any connection to any Bitcoin exchange or other clearing facility. At the end of the day, each contract will have a profit or loss, against each other. Crypto Market Makers could at their own risk, provide liquidity on-exchange and lay off risk independently, through the exchanges. But practically, why would they? Just to soak up 'newbie' liquidity from the moms and pops now able to trade the futures contract through their IRA? Something certainly doesn't add up here, and given the chaos and volatility we saw all week, we are expecting at best, a total market meltdown; at worst, they may cease trading the contract. There is certainly a lot of money waiting in the pipeline for the moment the contract goes live. And it's not the only one, CBOE has a contract too, which is the first one which will go live.
Traders wait in anticipation this week to see how the market will react to the first regulated Crypto contracts.
To get in on the action checkout some Bitcoin resources we've added to our website by clicking here. If you want to learn more about Bitcoin from the perspective of digital currency, which we've been doing for 15 years, checkout Splitting Bits - Understanding Bitcoin and the Blockchain.
