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Exclusive: Physically delivered bitcoin futures hit markets in 2019: Interview with Cristian Gil


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Exclusive: Physically delivered bitcoin futures hit markets in 2019: Interview with Cristian Gil

LeapRate Exclusive… Coin Futures and CoinFLEX will be offering futures contracts as soon as next month to the Asian market. The new contracts will provide possible leverage of up to 20 times. Such physical futures contracts are considered to be more valuable, as the value is tied to an underlying asset, rather than fiat currency. This means of compensation, therefore, cannot be manipulated and is thought to add another degree of credibility to the largely unregulated crypto-sphere.

Cristian Gil, Co-Founder of GSR, a fast-growing programmatic trading company in the cryptocurrency space, joins LeapRate today for a commentary. Cristian Gil is a former fixed-income strategist and commodities trader for Goldman Sachs.

LR: Hi, Cris and thank you for joining us today. Bitcoin futures have proven to be lucrative so far, with the daily volume of CME increasing by as much as 93% in Q2 2018 compared to Q1. From your perspective, what will the demand for bitcoin futures be in 2019?

Cris: For several reasons, growth for CME’s bitcoin futures in 2019 will not match that seen in 2018. Primarily, from Q1 to Q2 of 2018, CME introduced their market making incentive program, which increased overall liquidity and brought in new participants from traditional markets. Unless a futures-based ETF, options, or other products based on the underlying CME or CBOE Bitcoin futures were approved and brought to market, these products’ expectations for growth in 2019 remain modest.

LR: Cboe and CME Group (NASDAQ:CME) launched bitcoin futures trading back in December 2017. Nasdaq plans to launch bitcoin futures in Q1 2019. Coin Futures and CoinFLEX will be offering futures contracts as soon as next month to the Asian market and will have to compete with Intercontinental Exchange’s crypto venture Bakkt… Yet Bitcoin has lost over 80% of its value. Why do you think these big companies are betting on bitcoin futures this year?

Cris: Likely, Nasdaq, Coin Futures and Lending Exchange (CoinFLEX), and ICE’s Bakkt have been monitoring the modest success of their competitors, CME and CBOE, and are looking to enter the space in their own way. All three exchanges are moving on their crypto futures offerings in different ways, which makes them first movers in their own regard.

Nasdaq has partnered with well-known ETF manager VanEck, and is appearing to offer better market surveillance tools to regulators to push an eventual ETF product forward. Meanwhile, CoinFLEX and Bakkt are entering the physically-settled crypto futures market. However, they are not necessarily in competition with one another, since CoinFLEX is unregulated and registered offshore, filling a different niche for investors. CoinFLEX is more likely to be in direct competition with existing crypto only futures exchanges like Bitmex, OKEx, and newcomer Bybit, by offering similar lower barriers to entry for traders, but with the ability to physically settle into a specific crypto.

In contrast, ICE’s entrance is more a play on providing the infrastructure for institutions to be able to trade and deal in actual bitcoin, through its digital warehouse custody solution, than as a actively-traded means for speculation. We would argue that the majority of Bakkt’s revenue, at least at launch, will be warehousing fees paid by customers storing their bitcoin with Bakkt. This digital warehouse could serve as a second-layer solution to Bitcoin’s scaling issues, while Bakkt customers can transact with each other. At the end of the day, the exchange will batch and settle all these transactions on chain. Furthermore, physically-settled futures contracts require margining in crypto, and these entities will be set up going forward to solve and capitalize on these challenges in terms of interest and lending.

LR: There has been speculation that bitcoin futures have stimulated bearish fluctuation. What do you think about that?

Cris: Indeed, these futures products have been widely blamed for being significant bearish catalysts, and the evidence does seem incriminating. Without a futures-based ETF product buying and rolling futures to expose equity investors to Bitcoin, the product has been left as a means of short speculation. In the same way that ETF products USO and UNG function to expose equity investors to crude oil and natural gas commodities, a futures-based Bitcoin ETF could have been introduced after several smooth futures expirations to the equity market. However, the SEC is in no rush to approve any kind of crypto ETF regardless of its merits, even one based on a CFTC-regulated futures contracts. Their focus has been terminating the predatory behavior behind launching ICOs, which are securities in their view. As these futures markets are closely monitored and traded largely by sophisticated and institutional players, it’s also within reason to argue that these markets should lead the spot markets in terms of price discovery. This is observable, as volumes spiked during the last leg down from $6,0000 in BTC.

It’s worth noting how small of an amount of capital relative to traditional markets could be leveraged to suppress prices. In comparison to gold futures for example, bitcoin futures trade on average 50 times fewer contracts and 300 times less notional USD (granted, at 15 times less leverage). Thus, price manipulation may be an easy exercise for larger players already involved in futures trading in traditional markets.

LR: According to you, what will their impact on the digital currency market be this year?

Cris: In the long run, we anticipate the environment and participants trading these futures will evolve, and these products should act as net positive as it has given bitcoin a commodity status and legitimized its existence in the traditional and institutional financial world. Further, we believe these futures markets will continue to grow and likely lead the way forward during the next bull market. Thus, they are worth observing closely to identify a change in volumes, open interest, and their overall bearish crypto narrative.

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Exclusive: Physically delivered bitcoin futures hit markets in 2019: Interview with Cristian Gil

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