With CBOE set to roll out Bitcoin futures trading Monday morning, the exchange announced this week that the margin requirements have risen from 33% to 44% due to Bitcoin’s recent extreme volatility.
As Bitcoin finished a tumultuous trading week, with coin prices climbing from $11,000 to heights of near $20,000 on the GDAX exchange, the weekend has brought worries of what effect futures trading will have on Bitcoin, especially in regard to market manipulation believed to be rife in the barely regulated Bitcoin market.
CBOE Market Protections
Because of the unique risks inherent with Bitcoin, CBOE are enforcing a number of safeguards, including halting trading for 2 minutes if the price swings more than 10% from the day’s previous settlement price or 5 minutes if the swing is more than 20%. Margin requirements – the amount of marginable securities that an investor must pay for with his/her own cash – have also been increased from 33% to 44%, a figure several times greater than that of other commodities like gold and oil. The minimum maintenance margin was also raised from 30% to 40%, specifically for Bitcoin, creating a premium for the futures.
Kevin Kelly, managing partner of Benchmark Investments, offered his insight into the increase:
One of the reasons why the futures margin requirements are so high is because of the limited size of the overall bitcoin market. There’s a lack of depth and breadth.
The initial announcement of Bitcoin futures was seen as a bullish sign for the digital currency, bringing with it mainstream recognition of the coin through association with traditional markets. It is being viewed as a way to ease Bitcoin towards wider financial industry acceptance, but doubters within both the Bitcoin and regulatory bodies still fear how traders could potentially manipulate prices despite the protections already set in place.
Market Manipulation Fears
As some of the largest cryptocurrency exchanges face outages and DDOS attacks during intense periods of market action, it has lead to fears that both CBOE and CME, along with the regulators who approved the futures trading, have not considered the move carefully enough when it comes to potential market manipulation of Bitcoin’s price. The Futures Industry Association (FIA) issued the following written statement;
We remain apprehensive with the lack of transparency and regulation of the underlying reference products on which these futures contracts are based and whether exchanges have the proper oversight to ensure the reference products are not susceptible to manipulation, fraud, and operational risk.
The Commodity Futures Trading Commission (CFTC) released its own statement on December 1, in which Chairman Chris Giancarlo stated:
Bitcoin is a commodity unlike any the commission has dealt with in the past. We expect that the futures exchanges, through information sharing agreements, will be monitoring the trading activity on the relevant cash platform.
Whether that does enough to assure the fears and concern of Bitcoin investors and the wider financial community at large remains to be seen.
Ty Gellasch, executive director of the Healthy Markets Association, warns:
The CFTC has strong anti-manipulation rules for futures, but those won’t necessarily protect investors if the bitcoin cash markets are manipulated.
Will Bitcoin futures trading be good for the digital currency or is there simply too much potential market manipulation? Lets us know what you think in the comments below.
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