The back story: LedgerX — a clearing and trading opened for business — won Commodity Futures Trading Commission (CFTC) approval in July to offer bitcoin futures; the firm already has about 20 institutional investors, including investment banks, hedge funds, prop trading firms and asset managers on board, and the derivatives contracts it is offering change the game for cryptocurrencies.
The first regulated cryptocurrency derivatives trades took place on LedgerX in October; more than $1 million (in notional terms) traded in just the first week, and that figure could grow once more firms look to make a profit in bitcoin. The immediate impact appears to have been increasingly stable and liquid trading, potentially tightening the bid-ask spread.
What’s happening now: With Bitcoin options and swaps available for trade, banks and hedge funds could put on large-scale trades and hedge their bitcoin, if they hold any; this should help to make the bitcoin market more efficient going forward.
For example, a trader who thinks bitcoin is due for a pullback could purchase put options with a specified strike price and expiration date. If they’re already in bitcoin and want to hedge their position, they also could throw on a put options trade.
The bottom line: With the CFTC already involved and the Chicago Board of Options Exchange also looking to offer futures, bitcoin derivatives trading is poised for liftoff. Again, this makes for a potentially stable and liquid market in cryptocurrencies.
Whether finance experts like it or not, the cryptocurrency game is becoming more and more like the stock market, or at least like the foreign exchange market with bitcoin taking the place of the dollar as something that can be played like a commodity but also used to purchase goods and services. With the advent of options and swaps, more financial firms could adopt bitcoin and other cryptocurrencies, tapping into the potential multi-billion dollar market.
Jeff Williams is the lead trader of PennyPro.com. He is a short-term trader of stocks under $10 a share, who has been watching bitcoin and trading stocks related to the cryptocurrency.