What Is LedgerX?

LedgerX is a digital currency futures and options exchange and clearinghouse. It is regulated by the Commodity Futures Trading Commission (CFTC). LedgerX is available for both retail and institutional investors. The exchange offers physical settlement of all contracts, block trading and algorithmic trading opportunities for institutional investors, and direct access for all traders. The exchange is open 24/7, enabling investors to trade anytime they want.

LedgerX was the first to offer Bitcoin mini contracts in the U.S. LedgerX's mini contracts have an underlying notional of 0.01 BTC, which enables the granular trading of Bitcoin and makes Bitcoin trading more accessible to individual investors.

LedgerX is registered with the CFTC as a Designated Contract Market (DCM), Derivatives Clearing Organization (DCO), and a Swap Execution Facility (SEF).

Key Takeaways

  • LedgerX is a regulated platform for trading Bitcoin derivatives such as futures, options, and swaps.
  • All of its contracts are physically settled rather than cash-settled.
  • LedgerX also acts as a clearinghouse for institutional investors who negotiate Bitcoin block trades directly with one another.

Understanding LedgerX

LedgerX offers retail and institutional investors cryptocurrency futures, options, and swaps—all of which are for physical delivery instead of cash-settled. With physically settled contracts, the underlying asset (in this case Bitcoin) is delivered upon expiration in exchange for U.S. dollars. All LedgerX contracts are physically settled. Since launching in 2017, the company has cleared more than 10 million derivatives contracts.

Like a regular futures contract, the company's Bitcoin mini futures contract obligates investors to buy or sell bitcoins at a predetermined price at a designated time in the future. The contract size is 0.01 bitcoin and moves in $1 increments. LedgerX offers contracts for the current month, the following month, and two quarterly settlements. The CFTC approved LedgerX for futures trading in September 2020.

The company's call options and put options give investors the right, although not the obligation, to buy and sell bitcoins at a predetermined price on a designated expiration date. The contracts are European-style options, meaning they can only be exercised on the expiration date. Investors must submit instructions to exercise their options, as in the money contracts will not be automatically exercised.

The swap contacts from LedgerX give investors are a relatively inexpensive way to buy or sell bitcoins. Swap contracts are priced at $0.05 cents each, meaning an investor can buy or sell a whole bitcoin for just $5 in fees. If selling, the investor receives cash immediately. If buying, the investor receives their Bitcoin by 4:00 pm Eastern Standard Time.

All futures and swap contracts are fully collateralized. This means if you are selling Bitcoin futures, you must have bitcoins in your account. If you're buying Bitcoin futures, you must have the cash available in your account. Buyers of call and put options must post the premium related to those options.

On March 25, 2021, LedgerX announced that 25,996 options contracts were traded on the exchange that day. As of April 2021, LedgerX offered futures, options, and swaps only on Bitcoin, but hopes to add Ethereum derivatives in the future. A service for institutional investors allows buyers and sellers to directly negotiate Bitcoin block trades with one another, with LedgerX acting as the clearinghouse.

Currently, LedgerX does not support trading on margin; full collateralization is required for all trades.

The Need for a Cryptocurrency Derivatives Platform

Companies like LedgerX provide a level of transparency, predictability, and safety for futures and options contracts that is unavailable in options offered through non-clearinghouses. They allow investors to buy or sell cryptocurrency puts and calls, which may help reduce the occurrence of wild fluctuations in cryptocurrency values by allowing investors to hedge against the extremes.

To be successful, LedgerX needs to attract high contract volumes in order to make investors believe that cryptocurrency derivatives are viable investments. This is not dissimilar to exchanges where cryptocurrencies are sold. Established exchanges such as Coinbase benefit from a virtuous cycle, in which their popularity draws in more investors and increases trading volumes, which in turn draws in even more investors and higher volumes.