CME Group is set to roll out its own Bitcoin futures trading Monday morning, under the ticker BTC, a week after the rival Cboe launched the first-ever cryptocurrency derivative listed on a major exchange over the weekend.
In its latest update on the matter, the exchange announced today that the initial margin requirements – the amount an investor has to set aside as collateral for potential losses – have been increased from 36% to 47%. Due to Bitcoin’s recent extreme volatility, the figure is several times greater than that of typical futures contracts like gold and oil. It should be noted, however, that the brokerage firms offering the product may apply higher margin rates. For example, Interactive Brokers offers trading of CFE futures, but with a much-higher 50 percent margin requirement.
Bitcoin continues a tumultuous trading week, with the digital coin prices dropping from heights of near $20,000 to $13,500, before stabilizing at around $14,500. The recent swings have brought worries of what effect bitcoin volatility will have on futures trading.
Things you should know about XBT
As market manipulation believed to be rife in the barely regulated crypto market, the CME is enforcing a number of safeguards, also known as circuit breakers. This will include halting trading if the price swings more than 7%, 13%, and 20% from the futures fixing price.
Moreover, XBT futures contracts are cash settled based on a U.S.-dollar-denominated auction price set by crypto exchange and custodian Gemini. This means investors will receive their final payment in cash rather than bitcoin. That also means that the Chicago-based exchange owner doesn’t have to deal with the headache of setting up its own bitcoin wallet.
The CME currently lists monthly contracts for the nearest two months in the March quarterly cycle plus the nearest two serial months not in the cycle. The final settlement value of the contracts will be determined by the price of a bitcoin index currently made up of prices in Bitstamp, GDAX, itBit and Kraken. Each contract will equal five bitcoins.
The introduction of bitcoin derivatives is an important step toward the development of the digital coin as a more established asset class, bringing with it mainstream recognition through association with highly-regulated bourses. Nevertheless, doubters remain concerned over potential market manipulation of Bitcoin’s price despite the protections already set in place.