Crypto Market Commentary
30 October 2019
Doc's Daily Commentary
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Mind Of Mav
US Crypto Options Are Horrible; But Don’t Ignore Them
Today we received details of a big piece of news regarding the future of Digital Asset trading in the US:
The Chicago Mercantile Exchange’s (CME) confirmed plans to launch Bitcoin options on its Bitcoin futures trading products in early 2020.
Not to be outdone, Intercontinental Exchange Inc., the parent of the New York Stock Exchange, announced last week that they will expand their cryptocurrency derivatives with a plan to offer options on its Bitcoin futures contracts.
The options will be available Dec. 9 on the Bakkt digital-asset trading platform, a consortium that ICE is a member. The contracts are designed to let institutional investors hedge or gain Bitcoin exposure. They’ll settle into the Bakkt’s monthly futures that were launched in September, the company said in a post.
This joins the current offering of CME’s cash-settled Bitcoin futures and Bakkt’s physically-settled Bitcoin futures, and it’s why 2019 has been a fascinating year in the development of the cryptocurrency markets.
2017 and 2018 represented a kind of rapid-fire version of the typical economic boom-and-bust cycle. However, 2019 has seen the markets for Bitcoin and other major cryptocurrencies enter a new phase of maturity. So much so, that they’re now coming to more closely represent the traditional financial markets.
You might recall that the CME and Cboe Global Markets Inc. both started selling bitcoin futures in 2017, but the latter eventually dropped its offerings earlier this year, ceding the market to CME. Every new product, from CME, ICE, and elsewhere, is another building block in what is expected to eventually be an institutional market for cryptocurrencies as their own asset class.
There are about 3,300 individual accounts trading bitcoin futures at the CME, the company said. Roughly 7,000 contracts trade each day. That is a small slice of the 4.3 million contracts traded daily on the exchange across all its offerings, which include derivatives tied to energy, stock indexes and interest rates.
“While futures give you a one-for-one exposure, whereby the movement of the underlying bitcoin translates directly to a specific dollar value per contract, an option gives you varying strike-price levels and can give you either downside protection, or upside exposure at a fraction of the underlying [assets’s] price,” Tim McCourt, global head of equity index and alternative investment products at CME, was quoted as saying in the SCMP report.
This year, Bitcoin dominance has also risen to levels unseen since before the ICO boom of 2017. In early September, Bitcoin accounted for over 70 percent of the total cryptocurrency market cap for the first time in over two and a half years.
The influx of institutional interest in Bitcoin over this year would account for that, as institutions prefer Bitcoin as a more established asset than altcoins.
Data from Grayscale Investments illustrates this institutional preference for Bitcoin. The cryptocurrency investment services provider recently published its quarterly report showing an acceleration in institutional investment in Bitcoin during this year.
In May, CME also reported a record trading month on Bitcoin futures, and by July, it had traded over 2 million contracts.
CME is hopeful that the options contracts will be as popular as bitcoin futures, which drive most demand (over 50% of trading volume) from Asian and European traders.
However, Doc is not convinced this will help retail traders (intitally), and is reminiscent of the terrible terms of the BTC Futures contracts:
“Horrible. Same as the futures where they are leveraging 5BTC. Totally impossible for small account holders. Good chance that US brokers like TDA and Fidelity will not even LIST these options on their platform for retail.
Remember, the CME is an exchange. Retail customers can’t get access to the exchange unless they go through an online broker. The broker has to list those products on their platform for you to get to them.
Retail has no access to Bakkt futures! These will likely be the same. Institutional only.”
But, it’s not all bad.
Remember that with its volatile prices, Bitcoin should make an ideal instrument for derivatives. Miners can use it to hedge production costs while speculators can profit from continuous price swings. Not surprisingly, then, the market for derivatives in the cryptocurrency industry dwarfs the spot market.
Data trackers Skew.com and BitcoinTradeVolume.com reported recently that trading in Bitcoin derivatives is anywhere between $5 billion and $10 billion and exceeds spot market volumes by 10 to 18 times.
Also remember that Bakkt and CME are targeted to the institutional players by design because that’s what is required to foster financial product adoption in the US.
Bakkt futures, which were launched with much hype in late September, have struggled to take off. Last Friday, however, the exchange seemingly came to life, setting a new all-time high in trading volume that nearly doubled its previous record day.
Therein lies Bakkt’s selling proposition to U.S. institutions. Since inception, the ICE-backed exchange has advertised itself as an “end-to-end regulated platform” with institutional-grade products that are either regulated or self-certified and monitored by U.S. regulators.
The difference of overall maturity between when Bitcoin futures contracts first launched in 2017 to the first Bitcoin options contracts this year cannot be understated. The institutions looking to build and enter the space have many more options for custodianship and financial structure than they did before.
Essentially, these initial products, while niche and laughably terrible, build the bridge for what comes after.
It should be stressed that despite the rapid expansion of cryptocurrency futures, options are still a relatively unexplored market — the development of crypto derivatives is still very much evolving.
Although there are now a small handful of exchanges offering options to retail traders, Dutch-owned Deribit was the first to market and continues to dominate the space. It started out in 2016, providing European-style cash-settled options, along with futures, backed by Bitcoin. Earlier this year, it started offering Ethereum-backed options and futures too.
Up until now, new users on Deribit’s Bitcoin futures and options trading platform didn’t have to undergo any stringent verification process. Even users in countries where the company does not officially offer services could easily bypass geofencing by simply using a VPN.
However, in a recent interview with the Flippening Podcast, Deribit CEO John Jansen confirmed that things are going to undergo certain changes in anticipation of the AMLD5.
He was referring to the new policy framework proposed by De Nederlandsche Bank (DNB), the apex banking authority on the company’s home turf. Per the new framework, all Dutch and EU-based businesses offering cryptocurrency-related services in the Netherlands must register with the DNB.
This is to ensure better supervision of the country’s homegrown cryptocurrency industry, the DBB confirmed earlier in Sep 2019.
On a related note, the Deribit CEO also ruled out the possibility of officially extending the company’s services to the United States. Apparently, he doesn’t want to inadvertently breach any U.S. securities law that could potentially trigger a harsh response from the U.S. government.
With Bakkt Bitcoin options set to launch before the end of the year, if interest from sophisticated investors can translate into an influx of serious cash, that could go a long way toward maturing the crypto market.
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