Izabella Kaminska writing at FT Alphaville:
The smartest bitcoin trade in town?
Over the last week or so, we’ve recounted the problems with bitcoin’s market structure and how they are likely to impact the upcoming launch of bitcoin futures (here, here and here)....MUCH MORE
In the course of explaining the structural difficulties, we’ve pointed out how the capacity of market makers and bi-directional traders to support the product is crucial if bitcoin futures are ever to become a success. Currently, this is unlikely to happen because there is no easy way to play both sides of the market without taking on huge amounts of credit, fragmentation, illiquidity and hacker risk on the physical side.
As it stands, CFD and spread-betting houses are the ones mostly attempting to provide this bridging role. Problem is, even they are struggling to process the risk — and that’s despite being much less intensively supervised than the more established players who would usually be interested in servicing futures markets.
Some sort of risk-absorbing entity, as a consequence, must appear if retail and institutional participants (who are used to fiduciary standards) are to step into the market in size.
As a result, there are only three possible scenarios from here on in:
The third option doesn’t necessarily prevent the second option from playing out, however, given such an entity would still have to be serviced by the CME/CBOE clearing systems.
- The futures (plagued by illiquidity and non convergence with the underlying) flop.
- The lack of a market-maker redistributing one-sided risk back into the market will see the risk transferred elsewhere, most likely into the clearing house (to the risk of the entire trading community).
- A less established player with a greater tolerance for risk — possibly a natural long — steps into the fray.
Nevertheless, let’s imagine such an entity exists. What would its game plan be? And why would it think it could handle the risk?
The easy answer to the second question is that it may have spotted an arbitrage it thinks could more than compensate for the risk at hand.
As to the game plan…
She had a couple others as well: