TD Ameritrade, E*TRADE and TradeStation, the three online brokerages, have waded into the bitcoin frenzy, offering customers the ability to trade the bitcoin futures from CME Group Inc. (CME) and Cboe World Markets. But while retail investors are clamoring to get into one of the hottest investments of 2017, these new futures products may not be suited for the inexperienced or retail investors at all. And it's not because the futures plunged around 40% last week or the extreme volatility tied to the cryptocurrencies markets – it has more to do with the lack of leverage.
That's according Tom Sosnoff, founder of online brokerage tastyworks, who told Barron's in an interview that one of the knocks against bitcoin futures for retail investors is the lack of available leverage. The brokerages that are offering the products set the margin requirement for bitcoin futures at 50%, while the clearing firms have even higher requirements. That makes it expensive to make a significant move with the futures.
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"The beauty of futures trading is leverage," Sosnoff told Barron's. "There's no leverage in trading bitcoin." With leverage, an investor can trade certain investment products without putting up the whole amount the trade will cost. Sosnoff said in the interview that one CME bitcoin futures contract representing five bitcoins would have cost around $80,000 last week, with the investor required to put up the entire amount of money if he or she were not using leverage. That limits the amount of investors who can trade a contract, he said.
The executive noted that, when the bitcoin futures were being created, the value of the underlying tokens was between $2,000 and $3,000, significantly below the current $15,800 value. Sosnoff predicts that, in the coming months, the bitcoin futures market will open up for more retail investors. He says to give it six to nine months, and then there will be a "fairly active options marketplace that will cater to the retail traders."
While bitcoin futures may not be ideally suited for retail investors, TradeStation, one of the only discount brokerages that was ready on day one to offer the CME and Cboe futures, saw brisk demand in the early days of trading. According to TradeStation, for the first week of bitcoin futures trading through Monday, Dec. 18, a total of 8,800 underlying coins were traded on the company's platform, which represents $165 million in value. Meanwhile, Nick LaMaina, TradeStation's senior vice president for brokerage services, told CBS that around half of the bitcoin futures traded on TradeStation are short sales.