Thomas Petterfy: Bitcoin Futures will Spill Risk into the Economy

Interactive Brokers believe settling Bitcoin contracts will be difficult due to the high volatility of the cryptocurrency.

Settling Bitcoin futures may turn out more problematic than expected, believes Thomas Petterfy of Interactive Brokers. The CME Group contracts, to be offered in mid-December, may need a special treatment to offset the risk of Bitcoin's wild swings. 

Bitcoin has shown it can lose or regain hundreds of dollars in a few short days or even hours, and that may cause much deeper losses when time comes to settle the futures contracts

The CME futures product will use 5 BTC as a base unit. Since only a fraction of the price is paid for the futures contract, one contract will cost $25. Calendar Spread and Basis Trade at Index Close (BTIC) will cost $5.

The Chicago exchange has also set in place trading limits to avoid problems with the settlement, by limiting trading in cases of great volatility: 

"Special price fluctuation limits equal to 7% above and below prior settlement price and 13% above and below prior settlement price and a price limit of 20% above or below the previous settlement price. Trading will not be permitted outside the 20% above and below prior settlement price."

Still, Interactive Brokers believes Bitcoin futures should be cleared separately from other products. Settling a contract when the value of the asset has moved by as much as 20% may lead to deep losses for those on the wrong side of the contract, or lead to trade freezes.

"Cryptocurrencies do not have a mature, regulated and tested underlying market.  The products and their markets have existed for fewer than 10 years and bear little if any relationship to any economic circumstance or reality in the real world.

Margining such a product in a reasonable manner is impossible.  While the buyer (the long side) of a cryptocurrency futures contract or call option could be required to put up 100% of the value to ensure safety, determining the margin requirement for the seller (the short side) is impossible."

The brokers also believe the trading limits set to the new product are not enough and may lock up contracts, leading to losses, similar to the booming silver market in the 1980s. Additionally, Interactive Brokers sees as the greatest risk the possibility that the whole clearing organization would be destabilized when the time comes to settle Bitcoin contracts.

"Unless the risk of clearing cryptocurrency is isolated and segregated from other products, a catastrophe in the cryptocurrency market that destabilizes a clearing organization will destabilize the real economy, as critical equity index and commodity markets cleared in the same clearing organization become infected," concluded Interactive Brokers in an open letter to J. Christopher Giancarlo, Chairman, Commodity Futures Trading Commission.

The announcement of Bitcoin futures lifted the spirits of the market, and there were more hopes of Bitcoin becoming a mainstream product, "tamed" by the contracts. But unknown risks may surface when trading starts. 

The Bitcoin price in the past week moved wildly, with a low around $5,500, to return soon after that to levels of $7,100 and above.