Regulated Bitcoin Derivatives Platform Launches.
LedgerX, the First Federally Regulated Cryptocurrency Clearing House and Exchange is Open for Business.
During LedgerX’s first week soft launch over $1 million worth of cryptocurrency swaps and options were traded.
From October 18- 21, Bitcoin rose from $5,150 to $6,150, while most alt coins, like Litecoin fell.
Correlation or coincidence?
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Here Comes Bitcoin Derivative Trading
The word “derivative” strikes fear and loathing in the hearts of gold and silver bugs and conjures fears of flash crashes, naked short selling and smash downs of precious metals prices during thinly traded sessions for no apparent reason. Such episodes have led to charges of manipulation and sentiments of despair that gold and silver prices may never reached their true levels. This has caused many gold and silver proponents to take the crypto currency plunge and allocate more of their funds to Bitcoin, Litecoin and other cryptocurrencies with the rational that the crypto markets are more closely tied to the laws of actual supply and demand and are not be subject to manipulation via derivatives. (although bot trading manipulation on crypto currency exchanges has long been suspected).
Derivative Bitcoin trading arrived last week via a company called LedgerX. Ledger X raised $11.4 million in a Series B equity round in May of 2017 with the concept that it would “establish a regulated Bitcoin options clearing house and exchange”. In July 2017, LedgerX became the first company to be granted approval by the U.S. Commodity Futures Commission (CFTC) to clear and settle cryptocurrency derivatives contracts.
Yesterday, LedgerX announced that Bitcoin derivative trading had begun. Ledger X opened its platform the week of August 16. From the LedgerX release:
“Institutions who have gone through our rigorous on boarding process over the last few months have had the opportunity to trade this week in what we called internally, a “soft launch.”…we were hoping for a quiet first week with minimal volumes to test the pipes…Wow, were we mistaken — we ended up completing swaps and options trades worth over $1,000,000 USD.”
The LedgerX Platform is federally regulated and as such to participate in on the platform participant must meet certain requirements. In order to participate on the LedgerX platform at launch, participants must currently be:
U.S. based and U.S. banked and must be regulated Financial Institutions or Investment Companies or other entities or individuals with signficant assets.
Questions Regarding Cryptocurrency Derivative Trading
Will Derivative Trading Boost or Suppress Cryptocurrency Prices?
Prior to the launch of the gold futures exchange in 1974 a December 10, 1974 cable from Ronald Ian “Ron” Spier, Charge d’affairs and Deputy Chief of Mission discussing the upcoming launch contained the following prescient language:
“THE BELIEF THAT THE FUTURES MARKET WOULD BE OF SIGNIFI-
CANT PROPORTION AND PHYSICAL TRADING WOULD BE MINISCULE BY
COMPARISON. ALSO EXPRESSED WAS THE EXPECTATION THAT LARGE
VOLUME FUTURES DEALING WOULD CREATE A HIGHLY VOLATILE MAR-
KET. IN TURN, THE VOLATILE PRICE MOVEMENTS WOULD DIMINISH
THE INITIAL DEMAND FOR PHYSICAL HOLDING AND MOST LIKELY
NEGATE LONG-TERM HOARDING BY U.S. CITIZENS.”
Trading of futures where physical settlement is the exception rather than the rule, allows notional amounts of gold and silver to trade far in excess of what is available to back such trades. As such, traders look to lock in fiat profits from their activities rather than to acquire ounces or kilos of precious metals. The notional value of gold and silver futures trading far exceeds the trade or sale of gold and silver bullion.
For commodities like silver and especially gold where the value is perceived in its fiat price, traders are easily satisfied with taking their trading proceeds in fiat currencies.
Will Bitcoin Futures Trade Like Gold Futures?
Bitcoin has emerged as more of a financial asset than a day to day currency. Hence, most holders of bitcoin hold it for price appreciation rather than frequent use to conduct transactions. As such, will bitcoin derivative trading take off? Will a significant derivatives market develop whereby traders will prefer exposure to the bitcoin price, rather than outright ownership of bitcoin? Delivery, storage and insurance costs dissuade many gold “buyers” from taking possession of their metals. Will the same rational apply to Bitcoin derivatives trading should it develop?
Will Bitcoin Be Manipulated in the Same Fashion as Gold and Silver Are Suspected of Being Manipulated?
Will Derivative Trading in Cryptocurrencies Bring Them into the Fiat Fold?
Proponents of Bitcoin and cryptocurrencies often suggest that due to their decentralized natures and fixed issue limits they are fiat and central bank killers. In “Cryptocurrencies – Fiat Killers or Strengtheners?“, we suggested that cryptocurrencies might strengthen the grip that central banks have on fiat currencies if they are able to fold them into payment system and allow for their taxation and regulation on exchanges. The advent of decentralized exchanges and atomic swaps, however, may make such taxation and regulatory oversight more difficult.
We’ve also noted that investment brokerage giant Fidelity Investments has conducted Bitcoin mining, tested using Bitcoin in its employee cafeteria and recently integrated the Coinbase interface on its customers’ trading home page. Clearly Fidelity sees the potential for fiat profits in cryptocurrencies.
Will the CME Group Enter the Digital Currency Derivatives Game?
With regulated derivative trading now a reality in the United States, the potential of the value of such trading would greatly exceed the value of Bitcoin itself. This is a point not lost on the CME Group, operator of the derivatives futures market trading exchange, COMEX. The CME Group is looking into developing a digital currency derivatives trading system according to Coin Desk. The CME Group is an investor in Digital Currency Group, of which CoinDesk is a subsidiary.
While the CFTC granted LedgerX a license to conduct business, it noted This Authorization does not constitute or imply a commission endorsement of the use of digital currency generally, or bitcoin specifically.”
Whereas Jamie Dimon CEO of JPMorgan called Bitcoin a fraud last month, the CFTC has not labelled digital currencies frauds or bitcoin specifically a fraud, giving hope to those that would like to see Bitcoin and cryotocurrencies gain mainstream acceptance and full legal status.
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