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Bitcoin Options Planned, New Futures Derivate Launched. But Is There Demand?

Published 09/26/2019, 05:54 AM
Updated 09/02/2020, 02:05 AM

Even as Bitcoin's recent spike appears to be burning out, there are still some exchanges that continue to believe in the future adaption of the largest cryptocurrency by market cap.

The Chicago Mercantile Exchange Group (CME), which already provides a Bitcoin futures derivative product, has announced it plans to launch options trading on its Bitcoin futures contracts in the first quarter of 2020. CME cited an increase in “client demand” as the reason for the new derivative. Regulators, however are still reviewing the product.


As well, as of this past Monday, CME's Bitcoin futures have a new competitor, another Bitcoin futures instrument that was launched on the U.S. Intercontinental Exchange’s (ICE) Bakkt subsidiary. However, unlike CME futures whose contracts are settled in cash, Bakkt's will be physically-settled, meaning via actual Bitcoin.

However, as Bitcoin hovers around $8,000 with the potential to head lower, is there really demand for these products? After all, when CME first introduced its Bitcoin futures trading derivative in December 2017, the Chicago Board Options Exchange (Cboe) had already launched its own BTC futures product. Of course, at that time Bitcoin prices were soaring—the cryptocurrency was trading at around $20,000 per token.

The Cboe suspended its Bitcoin futures product in March of 2019, the result of anemic demand.

Despite Cboe phasing out its product, there's still an appetite for Bitcoin options says Alex Lam, CEO of RockX, a digital services platform. He believes there's benefits for individuals taking a long position on the asset:

“Bitcoin options can allow crypto holders to lock in their returns or hedge risks. On the one hand, Bitcoin options can enable miners, for example, to lock in profits for a certain period of time. If the bitcoin price reaches or exceeds certain expectations, the profits are forced to realize, otherwise, miners can still gain some fees from selling the options.”

Indeed notes Lam, more sophisticated miners with sufficient financial expertise can use futures and options to hedge their risks.

However, Laurent Kssis, operational manager at CEC Capital and ex-CEO of XBT Provider, warns that CME offering BTC options isn't necessarily going to increase either retail investor or institutional uptake. It's not the ideal product for someone easily stressed by either expensive costs or volatility.

Kssis says these products are mainly seen as a yes or no within a betting scenario, regarding whether Bitcoin will raise or fall at a predetermined price on a specific day. As such, futures and options products are deliberately expensive due to their volatility characteristics.

There is already an option in Bitcoin in the U.S. under the supervision of the CFTC, LedgerX's regulated derivative platform settling contracts in digital currencies, he says.

“Keep an eye on implied volatility, ranging from 90% to 200% for a strike price above $13,000. As a comparison, equity indices are more around 15-25% and therefore that’s the reason why they trade at an expensive level.”

Demand For Bitcoin Derivatives?

Still, uptake for Bitcoin futures products has been difficult. But Fran Strajnar, CEO of Brave New Coin, a cryptocurrency market data provider believes the right product should be able to find a broader audience:

"Despite the struggles of products like the Bitcoin futures contracts on the CBOE exchange to create organic demand, there is still a powerful appetite for Bitcoin derivatives. Much of this demand is driven by products and exchanges accessible for retail customers, like the perpetual swap product tradable on the Bitmex exchange.”

Strajnar explains that Cboe futures prices were based on auctions conducted by the Gemini exchange, while direct competitor in institutional markets, CME, determined the price of its Bitcoin futures based on aggregate data from multiple spot price exchange feeds. As such, for traders, CME’s Bitcoin futures price was easier to trust. Thus it quickly became the preferred product for institutional cash that settled on Bitcoin futures. Clearly, Bitcoin derivatives are not homogeneous.

"CME's latest move is a positive signal for the BTC market," says Flex Yang, Founder and CEO of Babel Finance. He believes it will provide the cryptocurrency "with wider recognition of its development and greater significance as a new trading asset among the traditional financial world, bolstered by CME’s influence and status.”

These products are a necessary tool for institutions and investors to manage risk, Yang adds. And the introduction of options brings the infrastructure within the nascent crypto-financial industry one step closer to completion. He adds:

“While this launch is a welcome one, we do need to pay close attention to trading depth and volume growth as the impact can’t be overestimated at this stage.”

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