The final effect of CBOE and CME bitcoin futures has triggered widespread speculation amongst crypto aficionados. Some fear that such derivatives will help institutional investors to short bitcoin at record never seen before volumes thus paving the path for a massive price crash. Others hold the view that the massive inflow of money from institutional investors will help the price of bitcoin reach unprecedented heights surpassing the community’s expectation. Andreas Antonopoulos, a Greek-British Bitcoin expert had been advocating about the positivity’s associated with the crypto mode since 2012. He again came under public scanner as he took the center stage to explain the linkage in between prices of bitcoin which are determined on CME futures.
About 9 months back, Andreas assumed an oversight position over Chicago Mercantile Exchange & Chicago Board of Trade (The CME Group Inc.) for reference rates of bitcoin. CME Group, an American financial market company is all set to launch bitcoin futures on 18th December. Andreas shall be overlooking which bitcoin exchanges are utilized for pull pricing data which shall be used for determining the current price of bitcoin on the CME futures exchange. Andreas had added that two types of bitcoin reference rates are required to be formed before listing bitcoin on the CME futures exchange. The bitcoin Reference Real Time Index is a spot price which will be published on traditional platforms such as Reuters and Bloomberg and shall also be updated every 30 seconds. The moving average or Point Price shall be measured at 2 p.m. Central time on a daily basis and will be considered as the day’s price of bitcoin. Legal contracts forming a part of the futures exchange shall be underpinned by bitcoin Point Price and bitcoin Reference Real Time Index. This is also expected to resolve disputes arising in between two parties disagreeing over a particular Bitcoin price at the time of making the agreement.
CME uses two different criteria’s for determining the eligibility of bitcoin exchanges as a bitcoin data pricing source. The bitcoin exchange shall first have to publish prices on a consistent basis for being regarded as a reliable data source. It is also necessary for the bitcoin exchange to come with a trading fee as it simply cannot be a zero fee trading platform. Platforms devoid of trading fees are vulnerable to trading bots which can create fake volume. The cash settled CME futures market won’t allow investors to actually hold bitcoins. Every short position shall require having a corresponding long position for the bitcoin futures to be operated by CME. Both these positions will need to be capitalized against the CME by using US dollars. The customers opting for CME platform will need to deposit collateral which will get audited on a daily basis. This will entitle the customers of CME to take up both long and short positions which do not exceed the collateral.
Circuit breakers are also present in the CME platform who will halt trading if ever the price volatility of bitcoin crosses over the 7% threshold. It is a very unlikely scenario that investment bankers or traders who will take up greater risk to short bitcoin. The bitcoin miners shall be the most active short participants as they will have the ability to engage in bitcoin shorts without taking up too much risk. Miners can make optimum use of bitcoin short bets without incurring much loss with their underlying bitcoin asset holdings. Monthly electricity charges will have to be paid by these miners who are not aware of the final price of bitcoin. Miners shall have to close shop given the lack of cash flow if the price collapses suddenly. Andreas feels that miners shall take 10% of their bitcoin holding and put the same into a short position. Price collapse of bitcoin will help miners to recover their losses and tremendous price increase will help miners gain on their 90% even after losing 10% of their short position. Presently traders cannot take up a short position against bitcoins thus increasing its volatility. Both liquidity and volume is expected to be increased once CME futures are introduced paving the way for overall reduction in price volatility.
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Tarunima Ghosh Laha is a Finance Post Grad from St. Xaviers who believes Finance is more than just Balance Sheets and Ledger creation. This filmy bookworm who believes she was a sloth in past life also nourishes a penchant of owning a private zoo someday. Equipped with a laptop and online Lexicon she is all set to give finance a glamorous makeover in the form of exciting writeups with bang on info and flashy new words.
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