Will UK Platforms Now Include Derivatives Markets for Cryptocurrency?
The explosive growth of digital currency trading in 2017 has facilitated the development of new markets in the form of derivatives trading of cryptocurrency. At the start of the year, Bitcoin – the dynamic digital currency that burst onto the scene at the start of the global financial crisis, was trading around $992 per unit.
Today, almost a year later the same cryptocurrency is trading at $15,000 per unit, with a market cap of around $257.8 billion. There are currently 16.7 million Bitcoin in supply, with an average of 386,000 daily transactions taking place. This unprecedented shift in global trading activity has realigned the landscape, upended convention, and caused a tectonic shift in trading perspectives.
How is Bitcoin Trading Affecting the UK Landscape?
Bitcoin like all other cryptocurrencies is an intangible asset. It is for all intents and purposes a digital code – nothing more than a string of numbers on a logarithmic function. It has value because of public perception. Bitcoin and the blockchain technology it operates on is perceived as the best way for the Internet to function. It is decentralized, deregulated, secure, and allows for anonymous transactions.
In December, a brand-new market opened in the Bitcoin arena. It is known as futures trading on BTC. The objective of establishing Bitcoin futures markets is to provide a hedge against Bitcoin’s volatility. Speculators can go long or short on the price of BTC through futures markets. In the United States, two companies will kickstart proceedings, including the CME Group and Interactive Brokers. These companies are now offering Bitcoin futures trading. However, these derivative trading instruments will be managed strictly. For example, margin requirements of at least 50% will be in place, and no short positions will be possible at inception.
Various other brokers will likely follow suit in the future, including TD Ameritrade and Charles Schwab. Big banks including Citigroup, J.P. Morgan and others will likely put the issue on the backburner for the foreseeable future. Bitcoin is driven largely by speculative sentiment. If the big money goes against Bitcoin, it will cause reversals in prices. The risk of margin calls not being met is always a possibility with clearinghouses and given the systemic volatility of Bitcoin, more safeguards will need to be in place to guard against wild price swings.
What Impact Will Bitcoin Futures Have on Cryptocurrency Trading Activity?
A degree of caution characterizes the UK Bitcoin trading market now. Traders remain uncertain how the introduction of a futures market for BTC will impact the price of the digital currency. If a net short position is adopted, this could indicate negative sentiment and downward pressure for BTC. Hedging in the opposite direction is geared towards protecting assets from depreciation. The Telegraph ran a story suggesting that the Bitcoin bubble may burst as trading goes mainstream. The CBOE (Chicago Board Options Exchange) launched a Bitcoin futures contract on December 10, 2017.
The importance of such a move is evident in the money that can now legally influence the price of the digital currency. With institutional investments now betting against or in favour of digital currency, we are more likely to see either a stabilisation in prices, or a rapid deflation in Bitcoin. The CBOE futures exchange on BTC went live at 11 PM GMT on Sunday, 10 December 2017. Bitcoin prices reacted sharply to the move, and UK traders now have a brand-new derivatives trading instrument to hedge on.
In mid-2018, NASDAQ will be launching a similar futures option. Other cryptocurrencies are not immune to futures markets, and Ethereum may be next. Futures markets are typically traded with commodities like oil, sugar, corn, gold, soybean etc. Now, futures markets are trading digital currencies as well.
The ticker is XBT and there will be no transactions fees levied on Bitcoin futures through December 2017. Another important point to note is that this new futures market and associated spread betting activity on its will not be associated with Bitcoin units directly. There is simply price speculation on the cryptocurrency – no settling in BTC. Currently, BTC futures on the CBOE require a 44% margin.
How do you feel the UK trading market will be impacted by a Bitcoin futures market? Will brokerages in Britain start issuing Bitcoin futures?
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for spreadbettingreview.co.uk.