How will futures markets open up trading cryptocurrencies?

The View from LaSalle Street #2

I’m writing for our more traditional trader. If you’re 100% allocated in Crypto, I doubt very much that anything I say will matter much to you, nor are you likely to understand the market references made here. I’m OK with that, of course, and I wish you well. Meanwhile, for those of us interested in trading Bitcoin (now) or other cryptocurrency offerings (later), what we’re traditionally looking for is the following:

  1. Greater price discovery and rate transparency via a listed and regulated futures exchange
  2. A legitimate risk management tool for correlated investments (currently certain Cryptos)
  3. Access to this asset class without the need for the digital storage medium (cash settlement)
  4. Leverage – the magic behind all futures markets
  5. Known account placeholders (clearing members) whose legitimacy has been tested with a history of client safety
  6. Upcoming Derivatives that may or may not be an offshoot of these listings

The first area, price discovery via a regulated exchange is self-explanatory. Regulation is the Kryptonite of free-wheeling Crypto exchanges and the hundreds of ICO (initial coin offerings) who regularly bypass traditional capital-raising schemes and penetrate directly into speculative cash. Some have survived, to-date, and some have blown up in spectacular fashion, but none have guarantees beyond the allure of easy (and unlimited) money returns. To gain entrée into traditional investment avenues, there must be regulated derivative markets that are capable of existing on their own.

Risk management is a somewhat nebulous concept that may or may not mean much to speculative buyers of crypto currency, as is my third point: access to crypto without the need for a digital wallet, among other more hackable means. As such, all existing and upcoming futures offerings will be cash-settled, a means of trading that is time-tested and perfectly acceptable for most traditional traders.

Leverage? You know what that is, and you know you want it. Will you be able to utilize it? We’ll see. The way to access leverage is to open a safe account with a clearing member firm who offers it. All currency traders understand this mechanism. These Brokers are, of course, betting that the market itself will beat you before you can beat them, and have mechanisms in place to protect “the house” from being jammed by unexpected market moves. Unfortunately for them, nearly EVERY bitcoin market move has been unexpected. So “leverage” is a nebulous and virtually nonexistent concept today.

Lastly, the really great trader knows that derivatives are THE best method to manage the risk inherent in the outright ownership of a particular commodity. Therefore, we absolutely expect these initial (futures) offerings to lead to others such as ETFs, back-month spread trading, options and others. There will undoubtedly be other crypto currency offerings that will form the basis for an entire correlate spectrum of investment IF the Bitcoin Futures markets succeeds. We are at this point a long way from determining this fact.

Follow this column, and you will explore, along with us, the genesis of this exciting new trading medium.

Bill Hoerter

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