Trading in bitcoin futures just brought Armageddon closer

Published On: 12, Dec 2017 | Source:

Shishir Asthana

Bitcoin investors and enthusiasts were upbeat by the fact that the first day of the launch of futures trading in Bitcoins didn't see a fall as was expected of it.

Chicago-based derivatives exchange CBOE Global Markets launched bitcoin futures, making it the first-time investors could get exposure to the bitcoin market via a regulated exchange.

Many experts and bitcoin critics expected bitcoins to correct as they expected short-selling positions to be built up. This, however, did not happen and bitcoins closed higher, at a premium to 'spot' bitcoin rates.

Bitcoin futures opened at USD 15,000 on Monday and closed the day at USD 18,545, a gain of 23.6 percent. In terms of volumes 3,969 contracts changed hands totaling -- roughly worth about USD 68 million -- which is less than 0.5 percent of all bitcoins in the market. On account of the sharp rise in futures prices trading was stopped twice (circuit breaker triggers), as the market went up 10 percent and 20 percent, respectively. Bitcoin ‘spot’ closed the day at USD 17,148, with futures trading at a premium of 8 percent.

Bitcoin supporters have reasons to be bullish given the strong run on the first day of trading. However, it’s still early days for the cryptocurrency’s movement on the exchange. There are other issues why shorting bitcoin is difficult. Since each bitcoin contract has five underlying bitcoins the amount of each future contract is large. The high margin levels of 35 percent are prohibitive for many retail investors. Given the volatility in bitcoin the margin can be wiped out very fast.

But a more worrying part of bitcoin futures is the likely impact it can have on other financial markets. Allowing bitcoins to be traded on the CBOE is giving it legitimacy. Other exchanges like the CME is also expected to launch derivative contracts for bitcoin on December 18, 2017.

What this means is that despite various governments and their central banks warning against investing in bitcoin, allowing the currency to be freely traded is allowing it to be on par with other financial assets.

This is where the problem starts. Allowing derivative contracts means that the margins to keep a position open would either be in the form of money or shares. Any adverse movement will result in the trader either having to pay more margins to take care of the ‘mark-to-market’ losses or selling his investment to pay for the losses.

Bitcoins are supposed to be in a bubble zone as no one has yet figured out how to value the cryptocurrency. A sharp fall that is expected by many can cause havoc in all financial markets. The missing link between financial markets and bitcoin has been provided by the futures market, making the entire financial market vulnerable.

With stock markets touching new highs globally and the US Fed increasing interest rates we can see much more doomsday prediction going forward.

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