The arrival of bitcoin futures on the CME and Cboe were the cause of much excitement in the cryptocurrency world and broadly seen as a coming-of-age moment for the sector. However, they have failed to take off in quite the anticipated way and trading volumes have remained low.
Now Coinfloor, a trading platform based in London, will offer futures contracts with physical delivery on its new CoinfloorEX exchange. Contracts will launch next month and are aimed at hedge funds, institutional investors, miners and retail investors.
Coinfloor co-founder Mark Lamb told Reuters that, “when you talk to the liquidity providers, they all say the same thing, which is they want a physically delivered futures contract so they can hedge their exposure across exchanges.”
Though the CME and Cboe offer Bitcoin futures, these are cash-settled: no crypto-currency ever changes hands. This had led to concern that they are too open to manipulation. Author of “The Black Swan”, Nassim Taleb, has noted that without a physical deliverable, “someone long the future can push prices higher at settlement time with impunity, by “locking” profits (never having to resell a deliverable)”.
The hope is that the new futures contracts will provide liquidity and help smooth some of the extreme price volatility which characterises the cryptocurrency markets. As they are physically deliverable there is no cash price settlement risk: “you receive or deliver the actual physical asset, therefore there is nothing to manipulate at settlement”. This should also allow the suppliers of the product, the miners, better ability to hedge their price risk.
Bitcoin will be kept by Coinfloor in cold storage — i.e. not connected to the internet — and access will require multiple signatories. Coinfloor already runs the UK’s biggest spot cryptocurrency exchange, as well as another in crypto-hotspot Gibraltar. The new contracts are due to launch in April.
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