CME Bitcoin Futures Risk
The CEO of Interactive Brokers, Thomas Peterffy issued a letter to the CME requesting delay of the Bitcoin futures launch citing volatility which threatens the entire CME futures system. The CME has installed bitcoin futures halts for price moves greater than 7%, but Bitcoin has shown it can move much more than that. Peterffy does raise a good point – if Bitcoin does drop 25% or more in a matter of hours could this “blow up” one of the CME institution leading to margin calls, etc? The CME has stated that it wants to require much higher margin than other products:
I’d surmise that is probably not enough. The main reason is that Bitcoin does not yet have enough correlation with other assets to hedge. If you are long corn and short soybeans there is probably a correlation there that works for some type of hedge. Not so for Bitcoin. There is not yet a verifiable way to hedge a long position in Bitcoin Futures, either. Therefore if major losses are taken in Bitcoin the traders will have to liquidate other positions like oil, or even S&P futures. You could then surmise that a massive loss in Bitcoin futures could hit the stock market overall if traders have to liquidate S&P futures.
CME Bitcoin Price Index
The second issue with all of this is how the CME is creating its Bitcoin Price Index. (FYI The CME provides a reference paper here). Originally the CME included Bitfinex and OKCoin exchanges in addition to 4 others (GDAX, itBit, Bitstamp, Kraken). Bitfinex and OKCoin had to be dropped as they decided to punt US customers. Kraken on the other hand has had major tech issues. A quick search on reddit reveals irate customers complaining for months that you cannot login or place orders. Bloomberg too has picked up on this story here.
I bring this up because the CME is basic its prices on exchanges which may or may not be in existence in the very new future. When Bitcoin traders start to fear the viability of an exchange the Bitcoin price on that exchange can move way out of range relative to the other exchanges (see here).
At the end of the day Bitcoin Futures make sense, but they shouldn’t be launched hastily. If it launches and breaks, that could end up badly for all those involved and be a permanent black eye for Bitcoin on the institutional level.