Why Hong Kong investors are turning to the US to trade bitcoin futures

PUBLISHED : Monday, 12 February, 2018, 6:46am
UPDATED : Monday, 12 February, 2018, 6:46am

A growing number of Hong Kong investors are turning to the US market for trading bitcoin futures because they see it as safer than trading on Hong Kong’s unregulated cryptocurrency exchanges, according to brokers.

In the US, bitcoin futures were launched on the two major exchanges, the Cboe and CME, in December. Both have seen a rise in trading volume over the past two months.

The average daily turnover of bitcoin futures at Cboe stood at 10,296 contracts per day in February, up from 7,162 in January and 4,007 in December, according to the exchange website.

The CME saw an average of 1,978 contracts change hands each day in February, compared with 1,592 in January, according to CME data.

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The data is not broken down to show the proportion of Hong Kong investors. But Gary Cheung, chairman of the Hong Kong Stockbrokers Association, said many of the city’s futures brokers had witnessed an increase in trade on the US market.

He believes the rise in overall activity over the past two months has been down to the wild swings in the price of bitcoin, which dropped to below US$6,000 at one point last week amid tightened regulation in China, well below the peak of almost US$20,000 in December.

Bitcoin and other digital currencies are basically not regulated in Hong Kong because they are traded like commodities
Benny Mau, China Securities International Finance Holdings

“There are two types of Hong Kong investors who like to trade US bitcoin futures. There are bitcoin miners and other investors who trade bitcoin and want to use the futures products to hedge. The others are normal futures investors who purely want to take profit created by speculative futures trading,” Cheung said. 

Gary Leung, chief executive officer of TD Ameritrade, said his firm is among those that has seen more Hong Kong customers interested in trading bitcoin futures in the US.

“We have received a lot of inquiries about bitcoin futures since we started operating in Hong Kong last October, when the prices were surging,” Leung said.

Leung said his company has risk management requirements for Hong Kong clients who want to trade bitcoin futures. They must have a minimum deposit of US$25,000 in the account and experience in futures trading.

“This is because the product has a very high level of risk and its underlying asset is so volatile,” Leung said.

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In Hong Kong, bitcoin are considered to be commodities so they are not regulated by the Hong Kong Monetary Authority. The Securities and Futures Commission would only regulate them if they were structured as securities or futures products.

“Bitcoin and other digital currencies are basically not regulated in Hong Kong because they are traded like commodities. If the digital currency platforms have a problem or are hacked, the investors may suffer losses because the regulators might not do anything for them,” said Benny Mau, managing director at China Securities International Finance Holdings.

“This has discouraged many Hong Kong investors from trading digital currencies in Hong Kong.

“Instead, they’re trading them on the US exchanges, which are regulated. The futures prices may go up and down substantially but investors do not need to think about the counterparty risk or worry about the platforms having a problem. This is why bitcoin futures in the US are more attractive to Hong Kong investors.”

Jasper Lo Cho-yan, a senior vice-president at Haitong International, believes the Hong Kong investors’ appetite for the products may only be short-term.

“When bitcoin futures were launched last December, the bitcoin price was rising and everyone was optimistic. Now the price has tumbled and speculators may be finding it harder to make money,” he said.

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“In addition, many governments are increasing regulation of bitcoin and other digital currencies. This has raised questions about the outlook for the futures products.” 

China last week completely banned all digital currencies platforms, both domestic and foreign, while US and European regulators want to add restrictions.  

Hong Kong’s SFC said on Friday it has taken action against some platforms after receiving complaints from investors and that it would closely monitor them for any signs of fraud in cryptocurrency trading.