CME Group said it expects the upcoming launch of options on bitcoin futures contracts to draw demand from cryptocurrency miners and traders in Asia.
The US futures exchange is aiming to launch the new crypto-derivative product during the first quarter of 2020.
Tim McCourt, CME Group’s global head of equity products and alternative investments, said he expects the new contracts to prove as popular as bitcoin futures, which were launched almost two years ago. As much as half of trading volume for futures is accounted for by Asian and European participants.
McCourt said trading has picked up recently for the bitcoin futures. On May 13, a record 34,000 futures contracts were traded, worth US$1.3 billion, and equivalent to 170,000 bitcoin.
Now with options on futures, traders will have the ability to more precisely gain exposure to or manage the price risks of bitcoin.
“While futures give you a one-for-one exposure, whereby the movement of the underlying bitcoin translates directly to a specific dollar value per contract, an option gives you varying strike-price levels and can give you either downside protection, or upside exposure at a fraction of the underlying [assets’s] price,” said McCourt.
An options contract gives an investor the right to buy (a call option) or sell (a put option) the underlying asset at a specific “strike price” on or before the expiration date, allowing the opportunity to take advantage of price moves without actually owning a futures position outright. A futures contract places an investor under the obligation to buy or sell the underlying asset at a contracted price at a specified future time.
McCourt said he expects bitcoin options will enable miners of the cryptocurrency to more accurately hedge the cost of their production. Today, some miners who have operations in China are already using bitcoin futures contracts to hedge.
Year-to-date, about 7,000 bitcoin futures contracts, equivalent to about 35,000 bitcoin, have traded on CME Group on average per day.
The price of bitcoin has more than doubled in 2019. It was quoted at US$8,215.6 on Wednesday after plunging 40 per cent from a high of US$13,800 recorded in June. Bitcoin’s volatility and its drawn-out bear market last year had at one point forced many miners to unplug their gear as the price dropped below their cost of production.
In the US, rival International Exchange last month launched a physically-delivered bitcoin futures contract on its newly created market, called Bakkt. The response has thus far been lukewarm, as only some 900 contracts have been traded in the two weeks since launch.
McCourt said CME Group has no plan to offer similar physically-settled contracts, adding that its focus currently is on securing regulatory approvals and finalising the preparations for the new option contracts’ launch.
But some institutional traders see the real opportunities in implementing effective cryptocurrency trading strategies would come from additional instruments beyond just bitcoin, according to Jeff Dorman, chief investment officer and co-founder of Arca, a US crypto hedge fund.
“There is only so much you can do with just bitcoin alone, [as] there are only that many venues a fund would need to trade bitcoin and bitcoin-related securities,” said Dorman, adding that he expects competition faced by the CME Group would be stiff.
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