As a commodity with wide price fluctuations, bitcoin-based derivatives were perhaps inevitable – offering investors opportunities to hedge against or capitalize on the digital currency’s price volatility. And in fact, bitcoin derivatives are starting to take off. CME, the world’s largest futures exchange, announced that it will launch a bitcoin futures product, to go live in December 2017 pending regulatory approval by the Commodity Futures Trading Commission (CFTC).The new CME product will be settled via cash, and based on a new index called the CME CF Bitcoin Reference Rate. The index was created in late 2016 in partnership with the UK firm Cryto Facilities, and is based on price data from a number of bitcoin exchanges based in North America, Asia and the EU.
Although CME’s announcement was groundbreaking, it follows a few weeks of active bitcoin options trading on LedgerX, a New York-based start-up that is registered as a swap execution facility and derivatives clearing organization. Following its product launch in mid-October, LedgerX was pleasantly surprised to trade over $1 million notional in the first week, which rose to over $2 million in the second week of trading. Eventually, LedgerX may add derivatives products based on other cryptocurrencies to its offerings.
Not to be outdone, the Chicago Board Options Exchange (CBOE), the largest U.S. options exchange, also announced that it will offer a cash-settled bitcoin futures product in early 2018, pending approval by the CFTC. CBOE will use market data from the digital currency exchange Gemini Trust, started by the now-famous Winklevoss twins, to create its own bitcoin derivatives products and indexes.
Rumors are also swirling around a new derivatives exchange based on the digital currency ether, which will offer futures, non-deliverable forwards, swaps and forwards in the first half of 2018, with some of these products potentially being settled in ether if held to expiration. For now, the exchange is only known by its code name, “Virtuoso,” which only reinforces the air of mystery around the new trading platform.
2018 looks to be an exciting year for bitcoin (and other digital currency) derivatives….