Bitcoin futures promise wild ride for traders

Brokers say there is plenty of interest, while a former regulator says it’s ‘like adding rocket fuel to the volatility’.

The overnight launch of the first US bitcoin futures will let investors add bitcoin to their portfolios through the brokerages they use to trade stocks and options.

Is bitcoin not volatile enough for you? Try trading bitcoin futures.

The overnight launch of the first US bitcoin futures will let investors add bitcoin to their portfolios through the same electronic brokerages they use to trade stocks and options. And futures will allow people who think bitcoin is overpriced to “short” it — bet that its price will fall.

But a key point is that futures will let risk-loving traders place leveraged bets on bitcoin. That means they can magnify their profits if their bets pay off, but also face potentially steep losses if they are wrong.

“Cryptocurrency is already so volatile,” said Aitan Goelman, a former head of enforcement at the Commodity Futures Trading Commission. “If you’re futurising it, it’s like adding rocket fuel to the volatility.”

Bitcoin tumbled on the weekend, breaking below $US15,000 mark just hours after blasting through the $US17,000 milestone. The cryptocurrency briefly slid 11 per cent to trade around $US14,996 on CoinDesk, before rebounding slightly to last trade at $US15,644.

The slump comes after bitcoin on Thursday broke through the $US17,000 milestones.

Brokers say retail investors have shown intense interest in the new market. The first US bitcoin futures were set to start trading overnight on an exchange run by CBOE Global Markets, while CME Group plans to launch a rival contract on December 18 at its Chicago Mercantile Exchange.

“We’re seeing more calls coming in and asking for information and confirmation that we plan to support this product than for any futures launch in recent history,” said Nick LaMaina, a senior vice president at TradeStation, an online brokerage that plans to support both products. A spokesman for the Australian Securities Exchange said there were no plans in place for a local bitcoin futures contract.

Trading bitcoin futures doesn’t actually involve holding units of the digital currency. Instead, a futures contract is a bet on what the price of the underlying asset will be when the contract expires. The first bitcoin futures contract Cboe plans to list, for instance, expires the afternoon of January 17, 2018.

So if you think bitcoin will rise by mid-January, you can buy the contract, or go “long”. If you’re bearish on bitcoin, you call sell it, or go short.

To do this, you need to set up a futures brokerage account and put some cash in it. This is what futures traders call “margin”, and it is the key to making those leveraged bets that can result in either supersize profits or losses.

Every futures contract has its own minimum margin requirement. Exchanges demand greater margin for more volatile contracts, which forces traders to put more cash down if they want to place riskier bets.

For instance, to buy or sell CME’s main crude oil futures contract, traders must post about 4 per cent of the value of the contract. For natural gas, it is about 8 per cent. Bitcoin is so volatile that CME is requiring traders to post 35 per cent.

Here is how leverage in bitcoin futures might work. Suppose CBOE’s bitcoin futures are trading at $US10,000. CBOE has a minimum initial margin of 44 per cent, so to buy one contract — representing one bitcoin — you would need to post $US4400 in your brokerage account. (In fact you may need to post a bit more than that, because brokers can charge extra margin beyond the exchange minimums.)

After that, if CBOE bitcoin futures jumped to $US11,000, your long position would profit and your broker would shift $US1000 into your account. So you would enjoy a 23 per cent return on your initial investment of $US4400 — more than double the 10 per cent move in the market.

On the flip side, suppose CBOE’s bitcoin futures fell to $US9000 instead. Then your broker would yank $US1000 from your account. Thus a 10 per cent drop in the market would become a 23 per cent negative return for you.

Things could get worse. If bitcoin futures fell far enough, you could lose the whole $US4400 and end up owing more money to your broker.

Dow Jones Newswires