Bitcoin’s volatility has always been the most significant concern around the asset class. Nevertheless, the asset has moved past its ignorance phase as the institutions are increasingly adapting to provide services and products on it. The two most important of those from Financial Services point of view are contracts and custody arrangements.
Derivatives are financial contracts are bet on the price of the underlying asset. The financial institutions have grown to provide a variety of those contracts ranging from futures to binary options. Nevertheless, these are all instruments to bet on the price of the underlying asset according to one’s analysis.
Rise of Derivatives Contracts
Nevertheless, there has been a considerable rise in the demand of derivates contracts. Recently, LedgerX obtained a license from the CFTC to offer Bitcoin futures contracts. ErisX, backed by TD Ameritrade, also received the permit to offer Bitcoin futures contract on their platform. Moreover, Bakkt and Fidelity are also due to launch these contracts in the market on their platforms. Furthermore, the trading volume at CME has been growing consistently.
“CME #Bitcoin futures reached a record $1.7B in notional value traded on June 26, surpassing the previous record by more than 30%. The surge in volume also set a new open interest record of 6,069 contracts as institutional interest continues to build.” H/T: @CMEGroup pic.twitter.com/FgxtJ5PQ0a
— Gabor Gurbacs (@gaborgurbacs) July 1, 2019
Furthermore, in the US, concerns regarding the contracts are on the rise as well. The CFTC (Commodities Futures Trading Commission) oversees all the derivatives trading in the US. Moreover, due to its characteristics of being a global asset, Bitcoin derivatives contracts have been offered from Exchanges that operate outside the regulations to the US.
However, the CFTC noted that they are attempting to monitor all those activities and will soon put under the commission’s laws. James McDonald, CFTC enforcement director, told the media,
“We are closely following how cryptocurrency is being traded, including in its derivative forms that would be subject to our regulatory jurisdiction,”
Hence, the contracts that were considered to be safe from the purview of CFTC will now soon be accounted for with the commission.
The Risk for Retail Investors is Too High
Bitcoin’s volatility poses a significant threat to these options. Reportedly, the FCA (Financial Conduct Authority) in the UK is considering an outright ban on the sale of these contracts to retail investors. According to the authorities, retail investors might not be equipped well enough to adjust to the extreme volatility in Bitcoin price.
GSR, a cryptocurrency-trading firm led by former Goldman Sachs Group Inc. commodities traders has also joined the list of trading firms offering these contracts. Cipher Technologies, led by Gerald Banks, also started to provide derivatives this year. However, Mr. Banks told the media,
“We would not fathom pushing this to anyone who would not be fully versed in the risk or in the nature of the underlying asset,”
Hence, while the institutional adaptability is seemingly increasing in this space, its viability for retail investors is still in doubts.
Do you think that retail investors must be allowed to trade these contracts? What are the risks involved? Please share your views with us.
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