New cryptocurrency futures exchange CoinFlex, which claims to be the world’s first exchange that offers physical delivery for bitcoin futures contracts, wants to ramp up business from Asian retail investors who want to avoid falling victim to price manipulation that it says is rampant in cash-settlement contracts.
Mark Lamb, Hong Kong-based chief executive of the company, said contracts that physically deliver bitcoin and other tokens at settlement will benefit traders, who can be certain the spot and futures prices have not been manipulated and that they closely track the spot bitcoin price. This is because cash-settlement contracts, whose price is often calculated using a formula based on the spot bitcoin prices of other exchanges, can be easily manipulated.
“Professional and retail traders alike are affected by price manipulation in the cash settled futures market. In physical delivered contracts, anyone long at expiry receives the underlying bitcoin. There are no formulas involved,” Lamb said.
He did not comment when asked if CoinFlex was offering services to Hong Kong-based customers. The city’s Securities and Futures Commission proposed a regulatory framework on cryptocurrency exchanges in November 2018, and has said it was unlikely to grant licences to exchanges that offered the trading of futures and derivative contracts.
Lamb said he had seen an increase in attempts to manipulate prices over the past few months, by traders who moved the underlying spot prices that go into the formula in their favour, as they took advantage of the thinner trading volume of the cryptocurrency spot market compared with that of futures. Currently, the trading volume of bitcoin futures is 1.5 times that of spot.
CoinFlex closed a US$10 million financing round last week from several blockchain investors, including Polychain Capital, NGC Ventures, a multi-strategy cryptocurrency fund, Divergence Digital Currency, and bitcoin cash advocate Roger Ver.
CoinFlex, which has 23 employees, launched its trading platform in February. And Lamb was not coy about its goal to overtake BitMEX, the world’s second-largest cryptocurrency futures exchange with a daily trading volume of US$2.86 billion, according to cryptocurrency ranking and evaluation site Coingecko. BitMEX recently banned Hong Kong users amid increasing regulatory scrutiny of cryptocurrency exchange operators globally.
Price manipulation was suspected in May, when Bitstamp, another exchange, reported a huge sell order on bitcoin that tanked its price by 18 per cent in 11 minutes, according to online media The Block. This, in turn, led to the liquidation of long positions worth about US$250 million on BitMEX, whose contracts reference Bitstamp prices.
Lennix Lai, financial markets director at OKEx, another derivatives exchange with operations in Hong Kong, which offers cash settled bitcoin futures, said a major drawback of physical settlement was that in comparison with cash settlement it is very expensive. Physical delivery incurs additional costs, such as the bitcoin transaction fee.
“For most users, they do not want to physically settle their futures because it means dealing with fiat currencies, and having the total bitcoin in hand. [This contrasts with] oil futures trading, whereby physical settlement is a suitable use case, as traders need the actual oil for the settlement. But for cryptocurrency, it is not necessary,” he said. OKEx, ranked by Coingecko as the world’s biggest futures exchange with US$2.98 billion in daily volume, has also banned Hong Kong users.
Benjamin Roth, global head of trading at Kenetic Capital, a digital asset proprietary trading firm, agreed that while physical settlement was less prone to manipulation, he had not seen much evidence of price manipulation in the cash-settlement market.
“Also, as traders we do not particularly worry about increased volatility going into a contract’s expiry, because traders naturally like to trade on volatility,” he said. He however, said he did believe there was demand in the market for futures exchanges that offer physical delivery for other types of users.
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