By Ria Bhutoria and Wilson Withiam
Know & go
- A closer look: We provide a closer look at recent developments around bitcoin futures and derivatives along with bitcoin futures 101.
- Three things to know: (1) A survey targeting U.S. social media users found about 80% of respondents are unlikely to buy Facebook’s Libra (2) The U.K. FCA proposed a ban on the sale of crypto derivatives and ETNs to retail investors (3) Casa announced its new application, Sats App with Sats Back rewards, is open for beta testing.
- Market snapshot: Total crypto market capitalization is around $303.4 billion at press time (down 4.2% w/w). BTC is trading at $11,189 (down 4.9% w/w), ETH is at $289 (down 4.6% w/w). BVOL (the rolling 30-day annualized Bitcoin volatility as calculated by BitMEX) is 91.6%, down from 65.4% last week. (7/5 1:30PM ET)
Weekly market snapshot
A closer look: Back to the future
A futures contract represents an obligation to buy or sell an asset at a specific date at the price specified in the contract. Contracts can be traded prior to settlement. Bitcoin futures (and futures in general) may be used to speculate and profit from the price of an asset rising or falling — they allow traders to use futures to go long (buy) or short (sell) an asset (and some futures products allow traders to take on leverage, which can magnify gains or losses). Stakeholders like investors or miners may also use futures to hedge their exposure to movements in the spot price of the underlying asset. This can be especially valuable in volatile crypto markets.
Contracts may be cash-settled or physically-settled. In cash-settled contracts, a trader will receive or pay the difference between the spot price and the futures price. CME bitcoin futures, for example, are settled based on an index of prices calculated as the volume weighted average price (VWAP) on four exchanges (Coinbase, Kraken, itBit, and Bitstamp) over an hour window (between 3-4pm London time) that is broken up into twelve five minute increments. CBOE contracts were based on the auction price of bitcoin on Gemini. CBOE chose not to renew its bitcoin futures product after the last of the contracts expired last month. Lack of interest could be a key reason, driven by the fact that contract prices were dependent on a single exchange, making it more vulnerable to manipulation relative to the index method CME uses. However, stakeholders like proprietary trading firms and investors are critical of cash-settled futures, in general. They believe it’s still possible for bad actors to manipulate the price of the contracts, regardless of the method used to calculate settlement price.
In physically-settled contracts, on the other hand, buyers take delivery of bitcoin and pay the sellers the futures price specified in the contract — this means there’s no need to worry about calculating an accurate spot price upon settlement, as the seller has to transfer the bitcoin to the buyer upon settlement. As a result, constituents believe physically-settled futures could offer a more reliable and robust alternative for the purposes of hedging or speculation.
CME futures ATH
The recent Bitcoin rally has been accompanied by rising investor interest in Bitcoin futures. CME reported record months for average daily volume in May — including an intraday high of $1.3 billion in notional volume on May 13 — and open interest (the number of unfilled contract offers) in June. JPMorgan confirmed these reports, estimating aggregate volume between CME and CBOE futures contracts topped $12 billion in May, itself a “jump from April’s $5.5 billion and a first-quarter 2019 monthly average of $1.8 billion.” In addition, these rising futures volumes may represent a greater portion of the overall Bitcoin market, according to Bitwise’s Matt Hougan, since a large portion of reported Bitcoin trading volume is believed to be fabricated.
Gareth MacLeod suggests the surge in trading volume could be a sign traditional finance is taking a greater interest in Bitcoin. But an analysis by Ryan Todd indicates that this assessment may be premature, as there appears to be “only 4-5 active asset managers/institutions playing in CME bitcoin futures market.” Regardless, increasing regulated futures volume and liquidity and an improving market structure will continue to establish legitimacy in the Bitcoin market from the perspective of institutional investors.
Recent news: Bakkt, LedgerX, ErisX, Binance
Positive regulatory developments over the last few weeks may allow pending Bitcoin futures platforms to launch their offerings and contribute to the gradual maturation of crypto products and market infrastructure.
To kick off a series of developments on bitcoin futures, Bakkt, which intends to launch physically-settled futures, announced in June that it will begin testing its “daily and monthly margined futures for bitcoin” towards the end of July. Bakkt plans to facilitate and clear trades through its parent company, ICE: “This contract will be traded on ICE Futures US (IFUS) and cleared on ICE Clear US (ICUS), a federally regulated exchange and clearinghouse regulated by the CFTC.” However, Bakkt will serve as custodian for the underlying assets, subject to necessary approvals (e.g. NYDFS approval for a trust company license). Coindesk previously reported that “Bakkt’s original plan to custody bitcoin itself and settle contracts through its parent firm’s warehouse, ICE Clear US, may fall into a regulatory gray area.” Thus, as a whole, Bakkt’s futures offering is still awaiting regulatory approval and the launch date is still unknown.
LedgerX and ErisX
The CFTC granted LedgerX a Designated Contract Market (DCM) license, an addition to the firm’s Swap Execution Facility (SEF) license and Derivatives Clearing Organization (DCO) license. As a result of these licenses, LedgerX is able to operate both the exchange and clearinghouse (LedgerX requested that the CFTC extend its DCO license to cover futures). The DCM approval enables the derivatives provider to start offering existing products (swaps and options) as well as new physically-settled bitcoin futures contracts to a broader set of clients, including retail traders. LedgerX will offer these products to the retail audience via a new platform made possible by the DCM license, called LedgerX Omni. According to the blog post announcing the news, Omni will be “the first and only regulated US institution to offer these capabilities to the retail audience.” While the company did not specify an exact date for launching its physically-settled futures, it expects to be the first to market.
The following week, ErisX’s clearinghouse (referred to as Eris Clearing) received CFTC approval for its Derivatives Clearing Organization (DCO) application, which will allow it to clear futures contract transactions when they launch later this year. Eris Exchange (Eris’ indirect parent company and swaps marketplace) has held a DCM license since 2011. The combination enables ErisX to facilitate the exchange (or execution) and settlement (or clearing) of futures contracts in a way that “reflects the structure that institutional investors expect from other asset classes.” Additionally, the CFTC granted Eris a no-action letter because the firm does not offer margin (it will be fully-collateralized), exempting ErisX from certain aspects of the Code of Regulations (specifically Part 39). In its blog post, ErisX placed emphasis on providing a high quality solution to institutions.
Both LedgerX and ErisX now have the legal clearance needed to start offering futures contracts that are settled in actual bitcoin to retail and institutional clients.
Binance also officially announced its crypto futures offering it has hinted at in the past. It is scheduled to go live in the coming weeks. Binance futures seem to be similar in nature to leveraged futures products offered by other crypto exchanges, including BitMEX, bitFlyer, and Kraken among others. While details about the product are limited (such as whether the contracts are settled in cash or in crypto), Binance CEO, CZ, stated the futures platform will initially only support the BTC/USDT pair with up to 20x margin — though the exchange intends to eventually add additional trading pairs and increase leverage down the line. In comparison, BitMEX offers up to 100x leverage on its perpetual bitcoin futures product and reported $1.1 billion in bitcoin futures ADV in April (BitMEX also recently announced it surpassed $1 trillion in overall trading volume in the last calendar year). On the other hand, Kraken offers up to 50x leverage on six crypto futures trading pairs, an effort that was accelerated when the exchange acquired Crypto Facilities, a U.K. FCA registered trading entity, earlier this year. Binance is likely targeting a different audience than CFTC-regulated futures platforms, but this product roll-out may allow Binance to take share in lucrative derivatives markets in regions in which it operates.
The excitement around physically-settled futures that are regulated by the CFTC stems from the idea that such products are superior to cash-settled futures because they are less vulnerable to manipulation. Richard Gorelick, head of market structure at DRW, is often cited for his comments to the CFTC on cash-settled futures: “We continue to have concerns that the way these futures contracts are pegged to these cash markets — which are less transparent — could result in dislocations in the future.” Proponents believe physical settlement should more closely tie spot and futures markets together and provide more robust options to stakeholders seeking to use futures for risk management, speculation or sophisticated trading. This is complemented by the fact that the companies gearing up to offer these products are backed by trusted incumbents in traditional markets (i.e. Bakkt/ICE and ErisX/Eris Exchange and TD Ameritrade). Further, regulated derivatives products, in general (i.e. LedgerX, Bakkt, ErisX, SeedCX, etc.), make it possible for more institutions to get involved more substantially. The combination of these factors, among others, lead many to believe impending crypto derivatives products and platforms could create more liquid and efficient markets. However, it’s probable that institutional adoption will be gradual, even once these products go live. Separately, derivatives offerings allow crypto exchanges (BitMEX, Kraken, Binance, etc.) to diversify their business model as well as provide traders on their platform with the option to deploy more sophisticated trading strategies. While derivatives are not without their risks, they have the potential to lead to more liquid, efficient and mature markets.
Note: The majority of futures trading currently occurs on relatively less regulated crypto exchanges like bitFlyer Lightning ($1.6 billion in XBTJPY perpetual futures ADV in April) and BitMEX ($1.1 billion in XBTUSD perpetual futures ADV in April), with a small portion taking place on regulated exchanges like CME ($256 million in ADV in April).
Also, CoinFLEX, a Seychelles-incorporated entity, began offering physically-settled futures internationally earlier this year. It is not regulated by the CFTC.
In other news
- A survey targeting U.S. social media users found about 80% of respondents are unlikely to buy Facebook’s new cryptocurrency, Libra. Respondents pointed to a lack of trust in Facebook as the top concern. Almost 40% also indicated they already use a mobile payment wallet and see no reason to switch to Facebook’s proposed Libra wallet, Calibra. Source.
- Brave, the company behind the privacy-focused browser of the same name, is introducing a feature on Reddit that will enable users on Reddit to tip each other with Brave’s basic attention token (BAT). Reddit users can currently pay each other via “tip bots,” but these bots are not native to the Reddit platform and may be difficult for some to use. According to the announcement, tipping with BAT will be integrated directly into Reddit and accessible by a single button. This new feature will only be available to users of the Brave browser. Source.
- Crypto exchange Huobi is planning to launch its own public blockchain network akin to Binance Chain. Huobi has partnered with Nervos to build the new platform — dubbed FinanceChain — which is intended to support decentralized financial (DeFi) services such as DEXs, STOs and lending markets, among others. Source
- The amount of BTC used for illegal activity is on the decline. A recent report from blockchain intelligence firm Chainanalysis estimates $515 million in BTC has been spent on illegal activity YTD, which represents about 1% of total BTC activity. This is down from 7% as of 2012. Source.
- TradeLens, the shipping blockchain solution developed by IBM and Maersk, will see two new participants: Hapag-Lloyd and Ocean Network Express (ONE). With these additions, the blockchain consortium now includes five of the top six shipping companies in terms of cargo carrying capacity (Mediterrenean Shipping Company (MSC) and CMA-CGM joined in May). Source.
- One of the founding members of blockchain development company Hedera Hashgraph left the firm earlier this week. Hedera has raised $124 million to date from Digital Currency Group and BlockTower Capital, among others, to build an enterprise-grade public smart contract platform to rival Ethereum, though its current capabilities have been called into question. The platform is open for testing purposes but is still awaiting mainnet launch. Source.
- BitMEX CEO, Arthur Hayes, told Bloomberg the crypto derivatives exchange is planning to launch bitcoin zero coupon bond in the coming weeks. The new market would enable bitcoin users to earn a yield on their bitcoin by loaning it to “some of the most stable companies in the space.” Source.
- Social media network Gab is relaunching its platform “as a federated network of interconnected servers.” The move towards decentralization is intended to “ensure that freedom, digital sovereignty and privacy come first,” according to CEO Andrew Torba. Gab is aiming to raise a $10 million Series A to help fund its new direction. Source.
- Cloudflare’s content delivery network (CDN) suffered a brief outage on July 2, rendering any websites it supported inaccessible for almost 20 minutes. Among the affected were a number of crypto trading and information sites, including Coinbase, CoinMarketCap and CoinDesk. As a result, automatic crypto pricing engines were severely impacted — for instance, CoinDesk’s crypto price widget momentarily displayed a price of $26 per bitcoin before a fix could be implemented post-outage. Source.
- Casa announced its new Sats App is open for beta testing. The Sats App is said to provide an easy yet encrypted connection to a user’s Case Node so users can send and receive bitcoin while maintaining control of their private keys. The app also includes a feature called SatsBack, which will reward users with small amounts of bitcoin for using the Sats App. Source.
- ParaFi, a new fund focused on crypto asset and blockchain investments, raised $25 million from Bain Capital, Dragonfly Capital and KKR co-founder Henry Kravis. The fund was launched by former KKR investor, Ben Forman. Source. (h/t @CastleIslandVC)
Global regulatory roundup
- The U.K. Financial Conduct Authority (FCA) officially proposed a ban on the sale of cryptocurrency derivatives and exchange traded notes (ETNs) to retail investors. The government body believes these products are “ill-suited” to retail investors, citing “extreme volatility,” risk for cyber theft and insufficient market knowledge among retail clients as specific concerns. Source.
- U.S. Rep. Maxine Waters and four other members of Congress submitted a letter to Facebook calling for the social media giant to halt development on its Libra network. The letter alleges Libra may pose a threat to U.S. monetary policy and the dollar. Some of the concerns rise from the lack of information provided in the Libra whitepaper as well as Facebook’s troubled past with customer data leaks. The letter concludes by stating, “failure to cease implementation before we can do so, risks a new Swiss-based financial system that is too big to fail.” Source.
What we’re reading
- Catching up on bitcoin by Howard Lindzon
- The Fall of Certificate Authorities and The Rise of Handshake by Imran Khan
- The State of Privacy Coins by Eli Ndinga
- Ethercluster: An Open-Source Alternative to Infura by Yaz Khoury
- Crossing shards by Jordan Clifford
- Decentralized Oracles: a comprehensive overview by Julien Thevenard
- Blockchain blossoms in Haiti in Venture Beat
- The Effects of the G20 Summit on Bitcoin by Kevin Kelly
- Investigation into the Legitimacy of Reported Cryptocurrency Exchange Volume by Alameda Research
- DeFi 101. Part 2— Margin Trading by Scott Winges
- Considerations for a Crypto Fund Audit by Jordan Palmer
- Libra, 2 weeks in by David Marcus
- Crossing Shards by Jordan Clifford
What we’re listening to
- Chain Reaction: Cadence’s Nelson Chu: The Digital Securitization and Investment Platform for Private Credit
- What Grinds My Gears: Welcome to FaceCoin
- Unchained: How Asia’s Trading Culture Results in a Vastly Different Crypto Scene
- What Bitcoin Did: Brad Stephens & Spencer Bogart on How Venture Capital Thinks About Bitcoin Investing
- Base Layer: Tom Jessop (Fidelity Digital Assets)
- Blockchain Insider: Tethery’licious Bitcoin
- Epicenter: PegaSys – Enterprise-Grade Ethereum Protocol Engineering
- Vexpoint: Tom Shaughnessy’s Institutional-Grade Crypto Insights
Circle in the news
- Circle CEO Jeremy Allaire joined CNBC’s Squawk Box again to discuss recent Bitcoin price movements and the potential impact of cryptocurrencies.
Where we’ll be in July
- 2019 Mid-Atlantic Anti-Money Laundering Conference, 7/23-7/25, Arlington, VA