Monster Margins for Bitcoin Futures

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As surging Saturday turns into slumping Sunday crypto currencies across the board are all flashing up red and the bears are dominating. Traders are awaiting the imminent launch of Bitcoin futures and the ability to short the digital asset. This has sent shockwaves through the markets and prices are falling sharply. At the time of writing BTC has shaved $4,000 off its peak of just over $18,000 and has plummeted by 25%. However it is still over double what it traded at this time last month and is currently hovering around the $14,000 mark.

Those wanting to participate in today’s new futures contracts offered by the Chicago Board Options Exchange will need to front more cash to do so. The initial margin requirements have been set by Options Clearing Corp at 44% of the daily settlement price. CBOE initially had a 33% margin requirement in view of Bitcoin price volatility. With swings of at least 15% in each direction over the past three days and the latest 25% drop higher margins are now needed.

The margin requirement is the amount investors need to set aside as collateral. This ensures that other parties in the trade know that losses can be covered. Bitcoin futures require a significantly higher margin than other commodities such as gold or oil.  

Benchmark Investments partner Kevin Kelly advised that “One of the reasons why the futures margin requirements are so high is because of the limited size of the overall bitcoin market. There’s a lack of depth and breadth.” The Futures Industry Association circulated a letter to regulators this week stating that the trade group of banks and brokers does not believe that crypto currency trading risks have been properly evaluated.

Some of the concerns included that exchanges failed to acquire adequate feedback from market participants on margin levels, stress tests and trading limits. As a result some of the big Wall Street banks are on watch and may not be offering the futures contract right away. Among those are JP Morgan Chase, Bank of America, Morgan Stanley, and Citigroup Inc. that are holding back from offering clearing for the contracts as they wait to observe how they will work.

Many investors and traders are eager to get in on the action but fear contradicting their bosses’ public statements. Many bank CEOs and industry leaders such as JP Morgan’s Jamie Dimon have spent the last weeks publically ridiculing crypto currencies and labelling them as ‘fraudulent’. They are all paying attention now.

The coming week is likely to bring more volatility to the crypto markets as the futures contracts are rolled out and several hard forks are still in the pipeline.