First bitcoin futures contracts poised to go down 40.3%
Predicting the bitcoin market seems likely to get a lot harder.
In a little under 48 hours the first ever futures contracts involving bitcoin will be settled. These contracts which began trade on 18 December 2017 will reach settlement at exactly 2:45pm Chicago time.
Available data suggest that there are a total of 6,420 open contracts with a further 2,918 open interest orders pending. Once a contract has been bought, that entitles the owner to then on-sell the contract if they choose – up until the expiration date.
These contracts opened for bidding at US$20,000. At the time of writing, the ask price for a contract was recorded at US$11,920, representing a drastic fall of 40.3%. Early on in the contract’s term, the price had already dipped to prices near what is seen now, hitting a 22 December trough of US$12,614. The price rebounded strongly over the next fortnight as bitcoin coin posted a resurgent US$17,653.10 price.
Whatever the outcome of the relatively shallow trading pool of 6,420 contracts, the original creators of the futures contracts, Cameron and Tyler Winklevoss, are likely to profit. The twins were famously part of a lengthy legal process as a result of a failed business venture with Mark Zuckerberg, now owner of Facebook. Since 2012 they have been involved in digital asset and cryptocurrency trading.
Market risks for Gemini
Less than two days from settlement of the first digital asset futures contracts, the Winklevoss twins are in a powerful position. The Gemini Exchange they operate appears posted to benefit from any activity in the futures sector. A statement from the Chicago Board Options Exchange notes: "The Final Settlement Value of an expiring XBT (bitcoin) futures contract shall be the official auction price for bitcoin in U.S. dollars determined… by the Gemini Exchange.” What this means is that the spot price of the futures contract is what Gemini exchange will sell their bitcoins for. That makes Gemini's rates key to future development of the sector.
Nonetheless, there are huge market risks for Gemini, including the general volatility of the cryptocurrency sector. Another issue is foreign exchange risk. On the Gemini exchange, bitcoin is traded against the US dollar but variations in price across global markets make this kind of business potentially risky.
According to CoinMarketCap, there were 20 markets at the time of writing where bitcoin could be purchased using the US Dollar directly. There were eight of those where the price of bitcoin was trading above the price of the CBOE futures contract, and therefore the Gemini spot price.
In cryptocurrency speak this represents a chance for arbitrage, where a trader seeks to make a profit by making a cryptocurrency trade in a different market for a profit. In the foreign exchange markets, this type of transaction regularly occurs, but generally at a difference of no more than US$0.01.
The differences in recent cryptocurrency trades are much higher. Of the eight exchanges that have a higher price for bitcoin, six of them are paying a premium of nearly or well above US$1,000. The 24-hour trading volume of those six exchanges equals US$209.25 million. That could mean as much as US$104.4 billion US dollars being exchanged for bitcoin each year.
Additionally, there are two exchanges, one in Japan and one in South Korea, that trade in their local currencies for bitcoin. When converted into US dollars at current rates, these two exchanges are trading bitcoin at a premium of US$2,000 to US$3,000 dollars higher. The combined 24-hour trading volume of these two exchanges equals over US$500 million in bitcoin trade alone.
As a result, Gemini’s spot price of US$11,700, trading at a discount of 27.3% compared to the Bithumb exchange in South Korea, represents a huge and certain profit for anyone with the ability to transfer bitcoin to South Korea.
Even with more robust forms of international regulations surrounding bitcoin and cryptocurrencies, Gemini likely cannot sell bitcoin at a discount of 27.3% and remain in business for long.
On 8 January, CoinMarketCap unexpectedly readjusted its entire cryptocurrency price calculations. In doing so, the world leading data provider excluded South Korean trade data. The effects of that change aren't yet clear.
At this stage of development, regulation on bitcoin will harm its potential in speculative trade. Bitcoin will continue to pose a challenge to regulators and more particularly, a challenge to the system of US dollar payments.
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