Many merchants coming into cryptocurrency markets from conventional finance could look to derivatives as autos for value hypothesis and hedging. There are many selections in relation to exchanges and devices; nonetheless, merchants ought to contemplate a couple of key variations between crypto futures and conventional futures earlier than dipping a toe into this quickly rising market.
Completely different devices
Merchants coming into cryptocurrency from the normal markets might be accustomed to futures contracts with a set expiration date. Though fastened expiration contracts might be present in cryptocurrency markets, a big proportion of crypto futures buying and selling is in perpetual contracts, also called perpetual swaps. This variation of a futures contract doesn’t have a set finish date, which means the dealer can maintain an open place indefinitely.
Exchanges that supply perpetual contracts use a mechanism generally known as “funding charge” to periodically stability the worth variances between the contract markets and the spot costs. If the funding charge is optimistic, the perpetual contract value is larger than the spot charge — longs pay shorts. Conversely, a unfavourable funding charge signifies that shorts pay longs.
Furthermore, merchants that come to cryptocurrency from conventional finance could also be used to the portability of their positions throughout completely different exchanges. In distinction, cryptocurrency exchanges typically function as walled gardens, which means it’s unattainable to switch derivatives contracts throughout platforms.
Regulated vs. unregulated buying and selling platforms
Many of the buying and selling in cryptocurrency futures — round 85 to 90% — is but to be regulated. This case primarily arose as a result of cryptocurrency futures markets sprang up whereas regulators have been nonetheless grappling with extra elementary questions across the authorized standing of digital property. BitMEX paved the best way for cryptocurrency futures buying and selling through the use of coin-margined and collateralized contracts. In doing so, the corporate averted the regulatory necessities related to fiat on-ramps. There are round a dozen main buying and selling platforms at present, however solely a small variety of them have achieved regulated standing.
Each the Chicago Mercantile Trade (CME) and Bakkt are regulated by the US Commodity Futures Buying and selling Fee (CFTC). In Europe, Kraken Futures operates underneath a multilateral buying and selling facility license awarded by the UK Monetary Conduct Authority. In Switzerland, Vontobel and Leonteq provide mini-Bitcoin futures contracts through the SIX Swiss Trade.
The regulatory scenario could preclude merchants in some international locations from collaborating in buying and selling on non-regulated venues. This circumstance is especially true of the U.S., the place exchanges are aware that the CFTC is now pursuing BitMEX for violating Anti-Cash Laundering laws and the Financial institution Secrecy Act.
Nonetheless, the U.S.-regulated crypto futures platforms have expanded their vary of devices past pure Bitcoin (BTC) futures, probably in response to growing demand. The CME, for instance, not too long ago branched out past Bitcoin futures and choices to offer Ether (ETH) futures too. As well as, Bakkt additionally provides Bitcoin month-to-month futures and choices.
Unregulated platforms provide futures contracts and perpetual swaps towards a broader vary of altcoins, though solely to merchants in international locations the place they’re permitted to function. In any case, most liquidity stays concentrated in BTC and ETH futures, a minimum of for now.
Differing regulatory landscapes, mixed with how perpetual contracts are managed, end in some sensible variations between crypto futures and conventional futures. As there isn’t a central counterparty clearing system, exchanges expose themselves to a excessive diploma of danger, significantly provided that many provide excessive leverages of as much as 125 instances. Due to this fact, dropping positions that attain the upkeep margin might be liquidated.
Exchanges sometimes divert any earnings from liquidations into an insurance coverage fund, which exists to guard merchants’ earnings when their counterparty doesn’t have enough margin to cowl the commerce. The presence and relative well being of an insurance coverage fund is a vital consideration when utilizing an unregulated trade. With out a fund, or if the fund turns into too low to cowl the losses incurred by liquidations, worthwhile merchants tackle the danger of getting their positions “auto-deleveraged” by the trade.
One other important operational consideration is trade downtime. Lots of the unregulated platforms have a repute for servers crashing during times of excessive volatility, leading to merchants being unable to shut their positions earlier than being liquidated. Due to this fact, it’s price researching a platform’s historical past of downtime earlier than opening an account.
Low obstacles to entry
The cryptocurrency futures markets typically have a really low barrier to entry. A dealer can open an account, bear the “know your buyer” course of, deposit funds, and begin buying and selling inside a matter of minutes.
In distinction, the obstacles to entry for exchange-traded futures are excessive as a result of contract sizes concerned, that are meant for institutional merchants. This case can be mirrored within the regulated crypto futures choices. Each the CME and Bakkt, the 2 regulated crypto futures buying and selling venues, have contract sizes of 5 BTC and 1 BTC, respectively. With costs at present exceeding $31,000, these contracts are evidently solely meant for these prepared to make a big funding.
Nonetheless, blockchain provides vital potential to remodel the futures markets past cryptocurrencies by asset tokenization. Suppose a futures contract for the Nasdaq-100 or S&P 500 was made obtainable as a token. In that case, it could possibly be traded in fractional increments, reducing obstacles to entry and introducing new sources of liquidity into conventional markets.
Such a situation could profit these trying to introduce a extra fine-grained diversification to their portfolio, which is at present solely doable through contracts for variations (CFD). Whereas they carry out the same position within the monetary markets, CFDs are solely obtainable through brokers, which reduces transparency for the dealer. It additionally fragments the obtainable liquidity within the broader markets.
Regardless of their speedy development, cryptocurrency futures markets are nonetheless very a lot of their infancy, significantly for the reason that institutional influx to crypto is barely getting began. Because the markets develop and develop, we’ll probably see new and extra subtle devices emerge, together with some blurring of the boundaries between conventional and digital finance. Moreover, it appears probably that the regulatory scenario will proceed to evolve as extra funds movement in. One factor is for positive: cryptocurrency futures have an extended future forward.
This text doesn’t comprise funding recommendation or suggestions. Each funding and buying and selling transfer includes danger, and readers ought to conduct their very own analysis when making a call.
The views, ideas and opinions expressed listed below are the writer’s alone and don’t essentially replicate or symbolize the views and opinions of Cointelegraph.
Andy Flury is a serial entrepreneur and quantitative buying and selling professional. Andy is a former Swiss Air Pressure pilot and led initiatives on the Swiss intelligence company and varied main banks. He additionally served as senior undertaking supervisor and software program architect at Siemens Switzerland AG. In 2010, Andy grew to become associate and head of algorithmic buying and selling at Linard Capital AG, a Switzerland-based quantitative hedge fund. Andy holds a grasp’s in industrial administration and manufacturing engineering from ETH Zurich and an Government MBA from the College of St. Gallen.