Only four months has passed since my last missive but so much has happened in this exciting space! In my last article, I felt strongly that the major Futures Exchanges, like CME, CBOE, ICE & Nasdaq would be the winners in the Crypto derivatives battle, so I was pleased to see CME have announced that they will list Bitcoin futures on December 17, 2017 and CBOE listing them since December 10, 2017.
Nasdaq has announced the intention to list as well and the other major exchanges will almost certainly follow-suit. The CFTC made a statement on December 1, 2017 allowing CME, CBOE and Cantor to list self-certified Bitcoin Futures contracts. This is a massive game changer!
But why is it so important?
One of the problems with Bitcoin and its crypto friends is the massive volatility. This is partly due to the lack of liquidity causing ‘thin’ markets which can be moved relatively easily by large trades.
Very few institutions have engaged with Bitcoin because of the scary monsters that live there. Unregulated and sometimes unprofessional crypto exchanges do not bring confidence to the market but Regulated Investment Exchanges (RIEs) like CBOE and CME exude confidence.
Filling the Gap Between Brokers, LPs, and ClientsGo to article >>
The futures markets feed liquidity back into the physical markets and as liquidity grows, volatility stabilises. Once the Futures markets are well-established then the CFD markets can flourish as they can be beautifully priced from the Futures contracts.
The Three Amigos
The Crypto landscape is now clearing a little. It was a pea-souper (Google this if you are a Millennial or Gen Z!) and now is just a foggy London day. What is emerging is a three-strand approach; Physical, CFD, and Futures Cryptos. All are separate asset-classes but all feed off and into each-other and the key things a broker needs to worry about are:
- Which of these three assets classes do I want to offer my clients?
- Which asset class should I use to cover my risk?
- Do I want to run an A, B or hybrid risk model?
- Do I want to allow my clients to go short?
Once you have answers to these non-trivial questions then you simply choose your LPs, hook them up to your chosen Crypto liquidity system. The real questions to help you answer the ones above? I would suggest the following:
- What asset classes do my clients actually need?
- Am I happy to run risk on such a volatile product?
- Will my CFD Crypto provider offer me a cost-effective solution that matches my client’s needs?
- How can I access the Futures markets?
- What will happen with Crypto liquidity in the next 6 months?
These types of questions will help brokers to get to the right solution now and in the near future.