The newest way to bet on bitcoin will be available later on Sunday when futures in the wildly fluctuating cryptocurrency start trading.
The first bitcoin future trades are set to kick off at 6 pm local time on a Chicago exchange.
The launch on the Cboe futures exchange has given an extra kick to the currency’s scorching run this year. It has nearly doubled in price since the start of December, but recent days saw sharp moves in both directions, with bitcoin losing almost a fifth of its value on Friday after surging by more than 40% in the previous 48 hours to $16,600.
On Sunday, bitcoin was up about 3% at $15,000 on the Luxembourg-based Bitstamp exchange and on the Gemini exchange it was at $15,650.
But while some market participants are excited about a regulated way to bet on or hedge against moves in bitcoin, others warn that risks remain for investors and possibly the clearing organisations underpinning the trades.
The futures are cash-settled contracts based on the auction price of bitcoin in dollars on the Gemini exchange, owned and operated by virtual currency entrepreneurs Cameron and Tyler Winklevoss.
“The pretty sharp rise we have seen in bitcoin in just the last couple of weeks has probably been driven by optimism ahead of the futures launch,” said Randy Frederick, vice-president of trading and derivatives for Charles Schwab in Austin.
Bitcoin’s value fell by more than $1,200 in trading on Friday
Bitcoin fans appear excited about the prospect of an exchange-listed and regulated product and the ability to bet on its price swings without having to sign up for a digital wallet.
The futures are an alternative to a largely unregulated spot market that is underpinned by cryptocurrency exchanges, which have been plagued by cybersecurity and fraud issues.
“You are going to open up the market to a whole lot of people who aren’t currently in bitcoin,” Frederick said.
The futures launch has so far received a mixed reception from leading banks and brokerages in the US and elsewhere.
Interactive Brokers, a US-based electronic brokerage firm, plans to offer its clients access to the first bitcoin futures when trading goes live, but will bar them from assuming short positions and has margin requirements of at least 50%.
Several online brokerages including Charles Schwab and TD Ameritrade will not allow the trading of the bitcoin futures for now.
Some of the big US banks, including JP Morgan Chase and Citigroup, will not immediately clear bitcoin trades for clients, the Financial Times reported on Friday.
Goldman Sachs on Thursday said it was planning to clear bitcoin futures for certain clients.
Bitcoin’s whipsaw run this year has boosted its volatility far in excess of other asset classes. The launch of futures may help dampen some of the sharp fluctuations in its value, analysts said.
“Hypothetically, volatility over the long run should drop after institutions get involved,” said Ophir Gottlieb, chief executive of Capital Market Laboratories. “But there may not be an immediate impact, say in the first month.”
According to JJ Kinahan, chief market strategist at TD Ameritrade in Chicago, the launch of the bitcoin futures could lend more order to trading on underlying spot market in the long run.
Analysts, however, warn that much of how the futures market will react is a mystery, given that bitcoin is unlike other assets.
“This is completely unknown territory,” said Frederick.
Fears of inaccurate pricing and systemic risk to clearing houses remain, should prices move sharply and clients fail to meet margin calls. Brokers have said that more safeguards are needed to protect against bitcoin’s volatility.