Bitcoin Risk Management via Futures: Available but Very Expensive

Monex TradeStation and Interactive Brokers first to deliver to brokers the ability to offset risks.

Yesterday’s launch of the first Bitcoin futures contracts was not as exciting to price action as many had hoped, but it certainly is changing the game for brokers looking to offset their Bitcoin risk. The CBOE product, that tracks the price of the world’s biggest cryptocurrency, suffered from poor liquidity and provided some arbitrage opportunities, but overall trading went smoothly.

According to public data, a total of 4,127 contracts changed hands on the first day of trading. At the first daily settlement price of $18545, this totals to about $76.5 million of trading volumes. The figure is dwarfed by the amount of money traded via traditional cryptocurrency exchanges, where over $12 billion changed hands.

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Commentators were quick to point out that institutional investors went nowhere near the new contracts. Speculation about the upcoming launch from the CME Group, an alternative that will aggregate prices from four different exchanges, might be the main factor behind the delay in interest from institutional investors. Others outline that the big money crowd is looking for the launch of options in order to be able to short the market.

Brokers Get Alternatives to Offset Exposure

One way or another, yesterday’s launch changed a lot for brokers looking to hedge their Bitcoin exposure. They now have a marketplace to go to offset risk. Amongst the more familiar players in the industry, TradeStation and Interactive Brokers have started offering the contract, with the latter only providing ‘long-only’ exposure.

Challenges, however, will remain, as futures contracts close for the weekend, while the cryptocurrency market remains open 24/7.

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Interest in the launch of the CME contracts appears to be larger (just like the size of the contract, which equates to 5 bitcoins). That said, the margin requirement for a single contract traded via the CME is about $30,000 per contract. For CBOE’s Bitcoin future product, TradeStation has implemented a margin requirement of 150 percent of the exchange’s collateral requirement of 44% of the previous day’s settlement price. Assuming the same number is used for the CME contracts, brokers that are looking to offset 5 BTC of exposure will have to post about $45,000 of collateral.

Feel free to reach out if you have any questions or would like to discuss the CME launch.

As we can see, brokers that want to manage their exposure to CFDs that they offer to clients at a leverage of 1:5 will need to post a substantial amount of collateral to protect themselves.

Direct Access for Retail Clients

With the 150 percent of the exchange’s margin requirement which TradeStation is asking from its customers, retail traders will need to post $11,220 of margin for a single CBOE futures contract if they are trading via the brokerage. Interactive Brokers is offering access to its clients only for BTC long positions and has a 50 percent margin requirement of the previous day’s settlement price.

Commenting to Finance Magnates, the President of TradeStation Group, John Bartleman, said: “Since we’re a self-clearing futures FCM it is easy for us to offer the new products as they launch. We’ve had a lot of customers asking us to gain access to cryptocurrencies. We are also expecting some moves on the equities side, as ETFs start getting approved next year now that the futures contracts go live.”

“Both Monex and TradeStation are looking at alternative ways to allow our clients to trade cryptocurrencies outright. We’re in the process of discussing partnerships with many different players in this space with a potential offering coming next year,” Mr Bartleman elaborated.

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