Any derivatives market is a bit complex. For cryptocurrency traders, especially if they are unfamiliar with advanced risk management topics in traditional finance, that complexity can often turn into confusion. Even seasoned finance veterans trip up and say futures when they mean options, and say options when they mean futures. What exactly is the difference?
CME v. Bakkt Bitcoin Trading Products
Let’s start with the basics. Currently, the Chicago Mercantile Exchange (CME) offers monthly bitcoin futures. You can check out the volume and pricing for those products here. Usually there are four or five monthly futures contracts live at any given time. They trade Sunday through Friday between 6:00 p.m. and 5:00 p.m. EST. That schedule leaves a 60-minute break each day beginning at 5:00 p.m. No trading occurs on Saturday. Options on these bitcoin futures contracts will begin trading some time in Q1 2020.
Bakkt bitcoin futures products trade on the Intercontinental Exchange (ICE) and trade every day between 8:00 p.m. and 6:00 p.m. EST. Monthly futures contracts are Bakkt’s first products traded on the market, with daily futures and options on the monthly futures product slated for the near future.
In contrast to the method at Bakkt, which settles who owes what to whom on its futures contracts with actual bitcoin, one huge difference between these two product suites is that CME bitcoin derivatives are “delivered by cash settlement by reference to the Final Settlement Price, equal to the CME CF Bitcoin Reference Rate (BRR) on the Last Day of Trading.”
These two product families were released and trade under the supervision of the US Commodities Futures Trading Commission (CFTC). No other currently traded bitcoin derivatives are regulated in the United States.
Futures v. Options in Academic Finance
That’s where we are at in the regulated bitcoin derivatives market. Now let us try to explain the need for these two different types of products in the market. Both futures and options allow one to buy or sell a product in the future. The differences lie in the terms to be met. A future is a standardized contract that gives you the right and the obligation after buying it, to buy or to sell a commodity in the future, at a fixed price settled when signing the contract. The fact that CFTC has ruled bitcoin a commodity makes it eligible for futures trading.
Futures are often used in the oil or agricultural industry, where sellers or buyers want to hedge their anticipated future revenues from production against the risk of price volatility in the future when production actually occurs. Signing a futures contract requires no fees but the contract must be executed. This feature is the “obligation” part of the contract. Also, a futures contract can only be executed on the date set in the contract.
Options, on the other hand, are a right but not an obligation to buy (call) or sell (put) a commodity in the future at a fixed price settled in the contract. Conversely to futures contracts, options contracts are quite flexible, since one can exercise an option contract whenever one wants during the time period between the contract signature and the expiration date. However, a premium is charged to set up the option. The longer the time period till option expiry, the higher the premium.
So why have cryptocurrency exchanges become so infatuated with these financial products? The simple answer is just to refer to the quote from BitMEX’s Arthur Hayes in one of our previous posts about bitcoin trading products. The goal is to attract more users that want to hedge the volatility risks of cryptocurrency. Futures and options are both excellent tools to reduce the volatility risk, since it fixes the price to sell or buy.
In the chart above, we show Bitcoin’s monthly average prices since 2017. Volatility describes the ups and downs of any financial product that has pricing. And bitcoin is no exception. From $13,860.14 in December 2017 to $3,441.03 in January 2019, bitcoin’s volatility tends to make common investors nervous about investing in it. In fact, the entire academic discipline of finance equates volatility with risk! In order to truly develop the crypto markets, robustly designed financial products such as futures and options are necessary to promote the confidence of token holders. Yes, even for bitcoin HODLers! At the very least, futures and options are a good idea for them to buy as insurance products that hedge the asset value of their holdings.
A major takeaway from the past few months of trading is that real trading volumes, at least according to sensible metrics like Messari’s Real 10, which does not include the inflated volume on shady exchanges, are down precipitously since the peak of the crypto markets in late 2017. Against this backdrop, volume on derivatives exchanges is still stable. Should volume ever return to traditional cryptoasset exchanges, and the 4th largest increase in bitcoin history that we saw last weekend may have signaled just that, the volume on derivatives platforms is likely to increase exponentially.
Another important point is that bitcoin dominance seems to be an unstoppable force. The most important digital asset, at least for the foreseeable future, is bitcoin. And it’s not even close. As such, it makes sense that the industry has trained its focus on developing products on top of bitcoin first and foremost. With bitcoin options and futures, crypto’s financial toolkit is developing, and it is only just the beginning.
One interesting possibility that has remained largely unexplored is the development of simple retail-friendly tokens that give token holders that might not be so well-versed in sophisticated quantitative trading strategies exposure to such innovative strategies that generate positive returns even in a subdued cryptocurrency market. Traditional token holders may not trust derivative exchanges yet, but they may be more likely to accept a derivative token that trades on a traditional cryptoasset exchange.
In conclusion, only CME and ICE have bitcoin derivatives that trade in US-regulated markets and options and futures are financial tools that are needed in the crypto industry due to the volatility risks that are such a big part of the current markets. Because of this evolution, token holders are able to better manage their risk exposure. Mainstreaming these tools will be an important part of increasing crypto adoption. Konstellation (DARC) and VegaX aim to play a vital role in supporting the development of these technologies and products.
Stay tuned!
Комментарии
Отправить комментарий