CBOE Bitcoin Futures Exchange Opens for Trading

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The Chicago Board of Options Exchange (CBOE) launches its futures exchange for Bitcoin at 5:00 p.m. CT, Sunday, December 10. Contracts will trade under the ticker symbol XBT and the CBOE is waiving all transaction fees for XBT futures for the entire month of December.

Contracts (in increments of 1 bitcoin)  will be settled in cash (U.S. dollars) every day based on Gemini auction prices. According to the CBOE, “the exchange may list for trading up to four near-term expiration weeks (‘weekly’ contracts), three near-term serial months (‘serial’ contracts), and three months on the March quarterly cycle (‘quarterly’ contracts).”

Why does all this matter? The main effect is to give market makers and hedge funds a way to play their favorite game: betting on both sides of the market. Without a regulated exchange, no institution would be willing to accept the credit, illiquidity, and hacker risks of the physical side of the trade.

Settling trades physically, in the case of a digital currency like bitcoin, would mean verifying the actual delivery of bitcoin into an inventory system or directly to a counterparty. The security and monitoring required to do that would be nearly impossible to bear. Hence, cash settlement in dollars.

As we noted, CBOE’s XBT exchange — and CME’s exchange launching December 18 — gives investors to make both long and short bets on bitcoin futures. Large investors will seek arbitrage opportunities where they don’t lose (a lot) whatever happens.

How successful the XBT will be among institutional traders may depend on margin requirements. Because bitcoin price swings are both large and arbitrary, a margin requirement of 30% or more may be required by a clearing house that doesn’t want to go broke. For comparison, a futures contract on crude oil (1,000 barrels) typically carries a margin requirement of around 4%.

It seems reasonable to expect that big traders will wait to jump in with both feet until the cost of financing arbitrage trades comes down — probably way down. That means that small, less sophisticated investors are going to be making a lot of directional trades, most of which will be long. That’s called speculation and, like all things, cannot go on forever.