Cryptocurrency Derivatives Series: Can Bakkt’s BTC Futures Follow CME’s Footprints?

Despite Bakkt’s launch of trading facility to physically deliverable BTC futures contracts, it was a bearish end again to September for the crypto-asset markets. 

Market benchmark BTCUSD fell 24.78% over the last 3-months. Last week was underscored by a sudden drop that saw the BTC price fall over 19% on WoW basis (dropped from $10,026.28 to $8,052.40). 

There are plethora of options in cryptocurrency derivatives marketplace as the digital assets as evolving gradually, CME’s BTC Futures, the new start-ups like, ICE’s Bakkt, BitMEX, LedgerX, Grayscale, OKEx, Deribit  and bitFlyer are lined up with their new derivatives products for crypto-assets to target their market share. 

Unwise to disregard the gradual maturing of the cryptocurrency space as the influence of institutional investors has grown in the aftermath of the listing of bitcoin futures since Dec 2017. Indeed, a few months ago we noted that the true level of institutional participation was likely greater than widely used trading volume figures implied, as a number of sources suggested that only around 5% of reported trading volume aggregated across cryptocurrency exchanges was genuine. 

Last week saw the tepid launch of new bitcoin futures on the Intercontinental Exchange with physical delivery in the Bakkt Warehouse. The listing of futures with physical delivery on a regulated exchange should serve to enhance the bitcoin market structure by allowing investors, particularly miners, to better hedge existing bitcoin exposures. This is because existing cash-settled futures may only allow for imperfect hedging as hedgers are susceptible to price risk associated with converting bitcoin to cash at maturity. And there is an issue of potential manipulation with cash-settled contracts as settlement is based on a collection of spot prices from a number of exchanges with variable liquidity, which traders may be able to manipulate around the time of the futures contracts expiry. 

Following the launch of the new physically delivered contracts, initial volumes after trading started this week have been rather low with less than 75 bitcoins traded on the first day. We note, however, that these low initial volumes carry echoes of the initial listing of cash-settled bitcoin futures by the CME and CBOE in December 2017. Initial volumes were low (refer above chart), but the open interest kept growing steadily. The listing of the CME futures coincided with all-time highs in bitcoin prices, and researchers at the San Francisco Fed suggested that by providing a market where bearish positions could be more readily expressed the listing of these futures contributed to the reversal of bitcoin price dynamics. In a similar vein, it may be that the listing of physically settled futures contracts (that enables some holders of physical bitcoin e.g. miners to hedge exposures) that has contributed to recent price declines, rather than the low initial volumes. Whether Bakkt futures trading mechanism also picks up the momentum and increase the volumes or not, the time factor should only decide. Courtesy: JPM