The bitcoin bandwagon just keeps rolling on. The red hot digital currency hit new highs over the weekend—and it's now got the weight of the world's biggest exchange operator behind it.
Financial market giant CME Group launched bitcoin futures trading on Sunday evening in the US, a week after a similar move by its smaller rival Cboe Global Markets, CNN reported.
The involvement of top financial institutions in the bitcoin market underscores its growing mainstream acceptance even as government officials, business leaders and economists continue to warn people against investing in it.
The CME launch "adds considerable legitimacy" to bitcoin trading, said Shane Chanel, an adviser at Australian investment services firm ASR Wealth Advisers.
Bitcoin's price hit a record high earlier Sunday before the futures trading started on CME. It climbed to within a few hundred dollars of the $20,000 mark before slipping back. By early Monday, it was trading around $19,000.
Investors were betting it will go higher. The January futures price on CME was about $19,500 Monday morning, down from an earlier high of $20,650.
The reference price, from which price limits are set, is $19,600 for the February contract, $19,700 for March and $19,900 for June, according to CME, Reuters reported.
On Dec. 10, Cboe launched bitcoin futures, which saw the price surge nearly 20% in its debut. The week-old bitcoin futures contract at the Cboe was last trading at $18,890, up 4.3%. Spot bitcoin eased 1.9% on the Bitstamp exchange to $18,650, after surging to a record high of $19,666 on Sunday.
Higher Margins
Some investors believe the CME bitcoin futures could attract more institutional demand because the final settlement price is culled from multiple exchanges. "The launch should increase buy side pressure and potentially be the catalyst that pushes bitcoin above $20,000," said Shane. "The introduction by CME and Cboe has added validity acknowledging bitcoin as a legitimate asset."
The Cboe futures contract is based on a closing auction price of bitcoin from the Gemini exchange, which is owned and operated by virtual currency entrepreneurs Cameron and Tyler Winklevoss.
The general sentiment in the market remains one of caution and that has been reflected in margin requirements for the contracts. In the futures market, margin refers to the initial deposit made into an account in order to enter into a contract.
The margin requirement at CME is 35%, while at Cboe, it is 40%, reflecting bitcoin's volatility. The margin for an S&P 500 futures contract, by contrast, is just 5%, analysts said.
One futures trader said the average margin for brokers or intermediaries on bitcoin contracts was roughly twice the exchange margins.
Futures are contracts that let investors buy or sell something at a specific price in the future. But unlike traditional commodities such as oil or agricultural products, bitcoins aren't physical assets. And unlike traditional currencies, there isn't a central bank that backs bitcoin. The virtual coins are created on computers using complex algorithms and recorded in a digital ledger.
Incredible Year
Bitcoin has had an incredible year. Its price has skyrocketed more than 1,700% since the start of January, partly on the expectation that more and more mainstream investors will begin trading it, CNN said.
That's prompted some high-profile figures in finance and economics to sound the alarm, cautioning that the currency's boom is simply a huge, speculative bubble.
But their warnings contrast with moves like those of CME and and Cboe to start bitcoin futures trading.
CME is home to about three times as much trading per day than Cboe. With CME's futures contracts, investors have to trade bitcoin in blocks of five, versus just one at a time with Cboe. The two also price their bitcoin contracts in different ways. Cboe bases its price on one exchange, Gemini, whereas CME takes an average from multiple exchanges.
Chanel said that the launch of futures on CME should eventually help iron out some of the wild gyrations in the price of bitcoin.
And more big names in finance are also planning to get involved. New York's Nasdaq is expected to launch its own bitcoin futures trading sometime next year. "If this market continues charging forward, (more) exchanges will be forced to act in the fear of missing out," Chanel said.
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