For a currency that has swamped news with its volatile prices, bitcoin had a relatively quiet futures debut. Edward Tilly, CEO of CBOE, said it was “business as usual” after the exchange launched bitcoin futures contracts on December 10 at 6 p.m. Eastern time. CBOE reportedly had 12 known participants at the start of trading. That number increased to 22 the next day.
Low Volumes and High Margins
Estimates for the average value of contracts trading daily vary. Bloomberg claims the total monetary value of bitcoin futures contracts was $50.2 million while CNBC reports a notional value of $60 million being traded on each day during the first week of futures trading in bitcoin. The overall trading volume for bitcoin at trading exchanges yesterday was $11.4 billion.
At present, there are three bitcoin futures contracts being offered by CBOE. The first one expires in January 2018. It had a trading volume of 1,515 and was the most popular at the close of trading yesterday. Contracts expiring in February and March 2018 were a distant second and third, with volumes of 201 and 144 yesterday at the close of trading. For context, VIX futures contracts expiring next Wednesday, December 20, had a trading volume of 128,771.
In an interview with CNBC, Cumberland Mining’s Bobby Cho attributed low trading volumes to two reasons. The first is that bitcoin's largest traders are not residents of the U.S. That may be true, given the enthusiasm for cryptocurrency trading in Asian markets. Over the last couple of weeks, Bithumb, a South Korea-based exchange, accounts for the second-highest trading volumes in bitcoin.
Further, Cho states that bitcoin miners are not present in the U.S. and are not built to trade financial instruments. That reasoning may be flawed, especially since it can be applied to gold, which has high trading volumes, and found lacking.
The real reason for low volumes may be the absence of institutional investors, who have taken a cautious stance and are performing due diligence while watching initial price action around futures. An example of this approach is Goldman Sachs, which is a clearing agent for CBOE trades. According to reports, it is demanding as much as 100 percent in margin amounts for clearing bitcoin trades.
Typically, futures prices are precursors to market sentiment and track real prices closely. In bitcoin’s case, however, that may not be the case due to the underlying volatility of its prices. Prices for bitcoin futures were in a contango, or increasing in relation to spot prices, at the start of trading. By the end of the week, some of that premium had been traded away. (See also: Price Difference Between Bitcoin Futures And Spot Markets Presents Arbitrage Opportunity.)
The difference in price between the spot market and bitcoin futures contracts was more than $1,000 on the first day of trading. Over the week, it fluctuated between 5 percent to 15 percent and was down to almost 2.5 percent on Thursday. At the close of trading yesterday, the January contract settled at $18,105. The price of a single bitcoin around at the time of the last futures trade was $17,660.12.
The Week Ahead
Investors looking to get in on the bitcoin futures game should expect that price difference to further come down as shorting against the cryptocurrency gains steam. Interactive Brokers began allowing shorts against bitcoin on December 13. In the meanwhile, greater awareness about bitcoin futures should also play a role in its price action.
TD Ameritrade said it will allow client access to CBOE futures starting Monday. CME launches bitcoin futures trading on Sunday evening. The CFTC has also published initial commentary on "actual delivery" of bitcoins. All of these developments should bring more participants into the futures markets and additional liquidity for its underlying asset. (See also: CME To Offer Bitcoin Futures.)