As we countdown to the launch of bitcoin futures trading on the CBOE (10 December) and CME (18 December), the big banks – via the Futures Industry Association - have suddenly got cold feet about the risks. We don't blame them, somebody's going to get hurt, the only question is who. The banks are worried it could be them. The FIA’s “primary” members include all of the usual suspects like JPM, Goldman, Citi, Bank of America, Morgan Stanley, etc. The risk they are most concerned about relates to clearing houses which, ultimately, they stand behind. The problem, of course, boils down to Bitcoin’s volatility, something we flagged after the CME announced circuit breakers early last month.
Having taken a gamble on bitcoin futures, which are set to begin trading by the end of the year, the CME is now seeking to avoid the consequences of what has emerged as both the cryptocurrency's best and worst selling point: its unprecedented volatility…While the CME already uses daily vol limits on most other markets, including crude, gold and market futures, to temporarily halt trading when price swings get out of control, the CME has never before dealt with something like bitcoinIn June, Bloomberg showed how Bitcoin’s 30-day volatility had risen to 100%, which was comparable (at the time) with one of the most volatile financial instruments they (and we) could probably think of - a three-times levered ETF in junior gold miners.
The CME has proposed three trading limits for Bitcoin futures, 7%, 13% or 20% up or down from the previous day’s closing price. The first two thresholds, for 7% and 13% moves, are “soft” limits, which would trigger a two-minute pause in trading of bitcoin futures. The 20% limit would be a hard stop after which trading would be halted. In the first ten months of Bitcoin trading in 2017, Coindesk calculated there had been 69 days in which Bitcoin moved at least 7%, 11 days in which it moved 13% and two days in which it moved 20%. In fact, we had another 20% intra-day move on 29 November 2017....MUCH MOREHuh, go figure.
Some Thoughts on Futures, Exchanges and Real Power
