Bitcoin becoming more mainstream with launch of second futures contract

This article is more than 12 months old

NEW YORK Bitcoin investors expect futures volumes to perk up with CME Group Inc, the world's largest derivatives exchange operator, launching its own contract to wager on the cryptocurrency.

The second US bitcoin futures launch is seen as another step towards big institutional investors warming up to a volatile asset that had until recently been accessible only via largely unregulated markets.

Like the futures contract launched last week by rival Cboe Global Markets, CME's will be cash settled.

But it will be priced off an index of data from several cryptocurrency exchanges, instead of just one.

"The CME contract is based on a broader array of exchanges," said Mr Matt Osborne, chief investment officer of Altegris, a US$2.5 billion (S$3.3 billion) alternative investments provider based in San Diego, California.

"So there is a possibility that the CME contract may generate more interest and more volume."

Bitcoin has drawn attention for its eye-popping price gains, but it is also notoriously volatile. Bitcoin exchanges and digital currency wallets meanwhile have struggled with issues like outages, denial-of-service (DDoS) attacks and hacks.

Bitcoin hit another record high last Friday near US$18,000 on the Luxembourg-based BitStamp platform, and has soared roughly 1,700 per cent so far this year.

Some investors believe the CME bitcoin futures could attract more institutional demand because the final settlement price is culled from multiple exchanges.

The Cboe futures contract is based on a closing auction price of bitcoin from the Gemini exchange, which is owned and operated by virtual currency entrepreneurs and brothers Cameron and Tyler Winklevoss.

To be sure, the general sentiment in the market remains one of caution and this has been reflected in margin requirements for the contracts.

Mr Andrew Busch, chief market intelligence officer of the US Commodities Futures Trading Commission in an interview with CNBC last week pointed out that the underlying cash market for bitcoin is still not regulated.

"It's important to keep that in mind when (investors) are trying to make a decision," he added.

Some analysts believe it is going to take some time before bitcoin futures take off in a big way.

Many professional traders use quantitative systems to identify trading opportunities and that requires a history of data which the bitcoin futures contracts do not yet have.

"Volumes are going to slowly increase as professional traders get comfortable with the price action and more importantly get comfortable with the volatility and the margin usage," said Mr Osborne. - REUTERS