Why Bitcoin Futures Are Poised For A Change

When they launched last December, bitcoin futures were expected to herald stability and a surge of liquidity in cryptocurrency markets. That hasn’t happened. Futures markets for cryptocurrencies continue to remain volatile and trading liquidity remains thin. (See also: How Are Bitcoin Futures Priced?)

But that expected future may still come to pass. 

Intercontinental Exchange (ICE), NYSE’s owner, is creating a new startup called Bakkt, which has plans to launch bitcoin futures contracts with physical delivery in November. Up until now, bitcoin futures contracts have been based on bitcoin prices at cryptocurrency exchanges. The problem with this approach is that operations at these exchanges have remained outside the purview of regulatory authorities. (See also: Price Difference Between Bitcoin Spot Price And Futures Contracts Is An Arbitrage Opportunity). 

As a result, institutional investors, who typically provide liquidity to futures markets by making markets, have largely stayed away from bitcoin futures contracts. By ensuring delivery of physical bitcoin, ICE will be fitting out a key part of the custody infrastructure required to equip bitcoin for mainstream acceptance. In turn, this is expected to attract institutional investors and liquidity to the ecosystem.

Record Bitcoin Futures Volumes 

Other recent developments, too, point to a brighter futures market for cryptocurrency contracts. 

The Chicago Mercantile Exchange (CME) recently announced record trading volume for 12,878 contracts for bitcoin equaling a notional value of $350 million for bitcoin futures. In all, contracts for 64,390 bitcoins were traded during that time. Those figures surpass the previous record for bitcoin trading set in April of this year, when more than 11,000 futures contracts changed hands at CME. 

The Chicago Board Options Exchange (Cboe), which beat CME to the punch in introducing bitcoin futures, is even further ahead. In April of this year, it recorded trading for 19,000 bitcoin futures contracts in a single day, beating the previous record of 15,500 contracts per day. The significant part of the April increases was that they occurred in the absence of a major liquidity event, such as expiration of futures contracts, which generally trigger sales by large contract holders. Bitcoin price also moved in tandem with trading for futures price contracts, registering sharp increases in both instances.

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