The world’s biggest exchange is joining the bitcoin revolution.
Bitcoin futures start trading Sunday night at CME Group Inc.’s venue, a week after Chicago rival Cboe Global Markets Inc. introduced similar derivatives on the volatile cryptocurrency.
CME’s version could make a bigger splash because the company is a much bigger player in futures than Cboe, handling about 55 times more volume during the first nine months of 2017, according to the Futures Industry Association. Cboe has so far traded more than 10,000 contracts representing about $180 million in bitcoin, data compiled by Bloomberg show. Many traders couldn’t access that contract because some brokers didn’t immediately offer them, said Garrett See, chief executive officer of crypto trading firm DV Chain.
“CME’s bitcoin contract may not be first, but they are a larger futures clearinghouse and we are looking forward to our clients trading their product on Sunday evening,” Brooks Dudley, vice president of risk in New York at ED&F Man Capital Markets, said in an email. “Not all market participants have been able to short the Cboe bitcoin futures. We have allowed our clients to go long or short to take advantage of dislocations between the futures and the underlying spot market.”
The CME futures are another step into the mainstream financial world for an asset created in the wake of the 2008 financial crisis as an alternative to banks and government-issued currencies. The contracts, which settle in dollars and trade on regulated exchanges, can be bought by institutional investors that are prohibited from buying bitcoin directly on largely unregulated exchanges.
“One of the biggest issues when it comes to investing institutionally in digital assets is banks and larger institutions can’t hold an unregulated instrument in their balance sheet, and a futures contract is something they can hold,” said Gabor Gurbacs, director of digital-asset strategy at VanEck Associates Corp. With futures, “you don’t hold the physical bitcoin, which solves custody issues and counterparty risks with these less-regulated exchanges.”
To protect against wild, mistaken price swings, CME will briefly pause trading if the contracts rise or fall 7 percent or 13 percent, and prices won’t be allowed to move more than 20 percent. Cboe also has volatility halts, which were triggered in the initial hours of trading a week ago, and its January contract rose as much as 26 percent on the first day.
“Bitcoin is a very volatile asset,” said DV Chain’s See. “It’s going to be interesting to see how often we hit limits and how long we stay there.”
Futures open up arbitrage opportunities — the chance to bet prices of the derivatives and the underlying cryptocurrency will converge. Last week, Cboe’s product was priced as much as 13 percent higher than bitcoin, but that quickly narrowed toward 1 percent.
The CME and Cboe bitcoin futures have some distinct features. Each Cboe contract represents a single bitcoin, whereas CME’s are linked to five. If CME handles 500 contracts while Cboe does 2,500 in a day, that could be viewed as a tie. The price of Cboe’s product is derived from the cryptocurrency’s price at a single exchange; CME’s is based off four.
Some brokerages didn’t immediately give customers access to bitcoin futures. TD Ameritrade Holding Corp. said late Friday that it will offer Cboe’s starting on Monday, though it’ll wait to offer the CME contracts until they demonstrate sufficient liquidity. E*Trade Financial Corp. is considering offering bitcoin futures, according to a person familiar with the matter who asked not to be named.
“We look at the volume, the open interest and the spreads, and we want to make sure that all those conditions are maturing properly,” said JB Mackenzie, managing director for futures trading at TD Ameritrade. “We have had a lot of customer interest, and we have spent a lot of time educating them as to the differences between the two products.”
Banks and brokers who are offering access are being cautious. Goldman Sachs Group Inc. demanded some clients set aside collateral equal to 100 percent of the value of their trades, people familiar with the investments said last week. The guidelines are inclusive of other margin requirements such as Options Clearing Corp.’s 44 percent, required to clear contracts traded at Cboe, and the 47 percent CME is demanding.
It’s not uncommon for a brokerage to impose steeper requirements than the exchange. Interactive Brokers Group Inc., which has said it handled 53 percent of the first day’s trading in Cboe’s bitcoin futures, will require a margin of 50 percent for long investments, and about 240 percent for short selling, based on current rates, according to Interactive Brokers spokeswoman Kalen Holliday.