In a bid to cash in on the growing popularity of cryptocurrencies, several new derivative products are being launched by exchanges across the globe. The latest to join the bandwagon is the United Kingdom-based cryptocurrency exchange operator Coinfloor, which is set to become the first exchange to trade virtual currency products that include physically delivered bitcoin futures contracts.

The London-based trading platform, also called CoinfloorEX, is introducing the products to cater to the growing needs of “hedge funds, proprietary trading firms and sophisticated retail investors, as well as cryptocurrency miners,” Mark Lamb, co-founder of Coinfloor, told Reuters.

CoinfloorEX will launch the first physically delivered bitcoin contract in April. (For more, see How to Invest in Bitcoin Futures.)

Though bitcoin futures trading is already available at many other established exchanges, like those operated by CME Group Inc and CBOE Global Markets Inc, they all offer cash settlement of bitcoin futures. That is, the settlement process does not involve any pay-in/pay-out of the actual bitcoins, and everything is settled in a cash equivalent value. (For more, see Bitcoin Futures on CBOE vs. CME: What's the Difference?)

Transfer of Crypto Instead of Cash

The settlement process of the physically settled bitcoin futures being launched by CoinfloorEX will involve the transfer of the cryptocurrency instead of cash.

The products will solve a big problem for the various market makers, arbitrageurs, and liquidity providers that may be operating across multiple exchanges. As long as the contracts are cash-settled, they are prone to price manipulation, as erring participants can significantly change the value of the underlying index or auctions on the spot exchanges which may result in an unfavorable position to the counterparty.

Using physically settled bitcoin futures, the market makers will now be able to effectively hedge their exposure across multiple exchanges.

Say a market maker is operating in bitcoin futures across two international crypto exchanges – one in the U.S. and other in the U.K. – which both are cash-settled and in local currencies of USD and GBP, respectively. Apart from the problem of erring participants changing the prices of the underlying on the spot exchange, the market maker also runs a currency risk if the contracts are cash-settled.

With physically settled contracts, they will always get cryptocurrency pay-ins/pay-outs which will nullify both the risks to a good extent, and they can operate seamlessly across multiple exchanges of their choice.

Launched in 2013, Coinfloor operates the biggest UK-based cryptocurrency spot exchange in London, and another Spain-based spot exchange called Gibraltar. (See also, Four Problems With Bitcoin Futures.)

Investing in cryptocurrencies and Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns no cryptocurrencies.