Bitcoin Futures Surge on Launch, Trigger Circuit Breakers

By 9 a.m. Eastern Time, the one-month futures price for the session had risen by almost 15 percent to $17,450 for the session, according to data from Reuters, with the two-month contract at $18,880 and the three-month contract at just over $19,000.

Demand for the product was so high that it triggered circuit breakers—mechanisms designed to restrict price volatility, which halt trading if limits are breached—twice, first at a 10 percent rise in price, resulting in a two-minute halt in trading, and again at 20 percent, prompting a five-minute halt. A rise in price to $19,500 would trigger the breakers for a third time. The Cboe website and that of a popular bitcoin spot exchange, Coindesk, reportedly crashed shortly after trading began.

“There was a fear that short selling would have an adverse impact on price, but we haven’t seen that yet,” said Craig Erlam, senior market strategist at foreign-exchange specialists Oanda, in a note.

Cboe is the first out of the gate with bitcoin futures, as the Chicago Mercantile Exchange (CME) Group prepares its own contracts for launch next week. Nasdaq is also planning bitcoin futures, but these will not be ready until mid-2018, according to a person familiar with the matter.

Each product is constructed slightly differently—Cboe’s futures reference the Gemini Exchange for their pricing, while CME’s rely on the CME CF Bitcoin Reference Rate, which aggregates prices among the top four cryptocurrency exchanges. Nasdaq’s futures, the source says, will reference over 50 exchanges.

However, there are concerns that futures on the notoriously volatile currency—bitcoin has posted gains of well over 1,500 percent this year alone, but is prone to precipitous drops that can lower the value of the commodity by thousands of dollars quickly—will have systemic implications that have not been examined thoroughly enough.

Market participants, including Thomas Peterffy, CEO of Interactive Brokers, told WatersTechnology last week that problems with trades could have severe implications for clearinghouses, which stand between buyers and sellers and guarantee the trade in the event that one party defaults.

“The clearinghouse is exposed to the health of the broker,” he said. “So even if you choose a broker who does not take any customers with bitcoins, you are still exposed, because if the brokers who do have bitcoin customers fail, that could destabilize the clearinghouse and cause the broker who does not have any bitcoins to become unable to serve its customers.”

To counter the volatility, futures commission merchants (FCMs) in the US have vowed to introduce margin top-ups well in excess of standard levels for futures contracts, including Interactive Brokers, which will charge 50 percent initial margin and will offer long-only trading, according to WatersTechnology’s sibling title Risk.net.

The Futures Industry Association (FIA), an influential lobby group, also expressed skepticism over the contracts and the ability of exchanges such as CME and Cboe to self-certify these for trading. In an open letter to US Commodity Futures Trading Commission (CFTC) chairman J Christopher Giancarlo, the FIA said that more time should have been taken over consulting with the industry.

“A more thorough and considered process would have allowed for a robust public discussion among clearing member firms, exchanges and clearinghouses to ascertain the correct margin levels, trading limits, stress testing and related guarantee fund protections and other procedures needed in the event of excessive price movements,” the FIA said in the letter, which was signed by Walt Lukken, the president and CEO of FIA, and a former commissioner for the regulator. “The recent volatility in these markets has underscored the importance of setting these levels and processes appropriately and conservatively.”

The CFTC has said that it had not officially endorsed the products when CME and Cboe announced their launch dates, and warned that it had limited statutory authority to oversee the underlying cash markets where bitcoin is traded.

Analysts have also questioned whether the launch of futures—which allow speculation on the price of the asset without necessarily owning it—will have a dampening effect on the underlying digital commodity itself.

In a research note posted on December 11, technology analyst Gene Munster of Loup Ventures said that the launch of these contracts could have a “material negative impact on the price of bitcoin” for two reasons.

The first, he said, was that investors will have an easier time betting against bitcoin by shorting it. Second, he added, was that “investors could move toward trading futures contracts and out of bitcoin itself. Futures contracts settle in USD, and provide investors with better liquidity than bitcoin. For institutional investors, betting on bitcoin without having to conduct bitcoin transactions is likely to prove easier.”

Elements of hesitation, however, have hardly dampened enthusiasm for the cryptocurrency’s move into regulated markets, which is seen as one of the crucial steps needed for wider institutional engagement with bitcoin.

Vela Trading Technologies, a market-access vendor, announced in a press release on December 11 that it would be ready to provide market data and trading access for clients from day one, adding that it had seen “significant interest” from customers.