Bitcoin sees wild swings ahead of launch of futures trading

PUBLISHED : Saturday, 09 December, 2017, 3:28am
UPDATED : Saturday, 09 December, 2017, 3:28am

Bitcoin lost almost a fifth of its value in 10 hours on Friday, having surged more than 40 per cent in the preceding 48 hours, sparking fears the market may be heading for a price collapse.

In a hectic day on Thursday, bitcoin leapt from below US$16,000 to US$19,500 in less than an hour on the US-based GDAX, one of the biggest exchanges globally, while it was still changing hands at about US$15,900 on the Luxembourg-based Bitstamp.

Having then climbed to US$16,666 on Bitstamp on Friday, it then tumbled to US$13,482, a slide of more than 19 per cent. It was last down 9.3 per cent at US$15,091.97 on BitStamp.

The Chicago-based CBOE Global Markets exchange is launching a futures contract on the digital currency on Sunday, to be followed by CME Group the next week.

Craig Erlam, senior market analyst, at OANDA in London said investors may have taken profits on their bitcoin gains ahead of the CBOE launch, which could open the door to short speculators who believe the price has risen far too quickly.

“The initial bounce after this morning’s sell-off suggests there’s still appetite for buying dips but that may not last if we don’t see the kind of rebound witnessed previously,” said Erlam.

“Saying that, the way bitcoin is trading at the minute, I don’t think anyone would be surprised to see it end the day in the green,” he added.

As investors braced for the CBOE launch, some of the big US banks, including JPMorgan Chase and Citigroup will not immediately clear bitcoin trades for clients once investors start trading futures contracts, the Financial Times reported on Friday, citing people familiar with the matter.

JPMorgan and Citigroup did not immediately respond to requests for comment.

Goldman Sachs on Thursday said it is planning to clear bitcoin futures for some clients as the new contracts go live on the exchanges in the coming days.

Bitcoin roars past US$17,000 in frenzied buying as US futures trade looms

Among the complications in trading bitcoin future contracts that launch on Sunday would be that people speculating on the cryptocurrency will need to put more cash on the table.

Options Clearing Corp has set the initial margin requirements at 44 per cent of the daily settlement price. CBOE, which announced that amount on Monday, has not updated it through bitcoin’s wild price swings in the days since. It was raised to that level from 33 per cent “in view of bitcoin price volatility,” the exchange operator said at the time.

A margin requirement is how much investors have to set aside as collateral, so that other parties in the trade know any losses can be covered. The requirement for bitcoin futures is several times that of commodities such as gold and oil.

“One of the reasons why the futures margin requirements are so high is because of the limited size of the overall bitcoin market,” Kevin Kelly, managing partner of Benchmark Investments, which analyses futures markets to develop indexes. “There’s a lack of depth and breadth.”

The Futures Industry Association said in a letter to regulators this week that the trade group of banks and brokers does not believe cryptocurrency trading risks have been properly assessed. The concerns included that exchanges failed to get enough feedback from market participants on margin levels, trading limits, stress tests and clearing.

For the week, bitcoin was still up almost a third. Since the start of October, bitcoin has more than tripled in price – its strongest quarterly performance since 2013.

And since the start of the year, its value has increased about 15 fold – a rise that led to growing concerns the bubble would burst in dramatic fashion.

The rise has drawn in millions of new investors. So far this week, more than half a million new users have opened wallets with retail-focused bitcoin wallet provider Blockchain, the firm said, doubling the total number of users to 20 million since last year.

“The fact that Cboe, CME and Nasdaq are preparing to launch bitcoin trading instruments in the near future could be perceived by investors as a further step towards an international acceptance of bitcoin,” said Peter Iosif, analyst at currency broker IronFX.