Physically delivered Bitcoin futures are gaining market share in the world of cryptocurrencies. Futures will be key distinguishing factor for CoinFLEX.
The owner of the New York Stock Exchange is expected to start offering contracts shortly and Eris Exchange LLC plans to follow, the firm that says it was first to market has spun off from its previous owners and will provide the derivatives on some of the largest digital coins to Asian retail investors beginning next month.
The venture is owned by a consortium including famed early crypto advocate Roger Ver and Trading Technologies International Inc, which develops trading software for brokers and money managers. Coinfloor, the UK’s oldest Bitcoin exchange, will also retain an equity stake. Co-founder of Coinfloor, Mark Lamb, will be the chief executive officer of the new business based in Hong Kong. CoinFLEX will offer futures contracts for Bitcoin, Bitcoin Cash, and Ethereum that can be leveraged up to 20 times.
The exchange will likely draw comparisons with, and seek to take business from, BitMEX, one of the largest crypto trading platforms, which also has a sizable presence in Hong Kong and was co-founded by former Citigroup Inc. trader Arthur Hayes. BitMEX offers leverage of up to 100 times on some of its contracts.
A key distinguishing factor in CoinFLEX’s favour is that all futures traded on the exchange will be physically-delivered, Lamb said in an interview. That means when the contracts expire, owners will be given the underlying cryptocurrency instead of a cash payment. That’s an important distinction in the largely unregulated markets where Bitcoin and other digital coins currently trade as some big players say the process for settling a contract in cash could be manipulated.
Lamb said, “Crypto derivatives could become an order of magnitude larger than spot markets and the main thing that’s holding back that growth is the lack of physical delivery. Volumes are reduced because of a problem of trust when it comes to cash-settled trades.”
The daily volume of trading in the underlying crypto market is approximately equal to that in derivatives, at around $3 billion, said Lamb. In other markets, futures volumes can be 20 times larger, suggesting there is plenty of room for growth in contracts tied to digital assets, he said.
The company will have to compete with Intercontinental Exchange Inc, the owner of the NYSE, which plans to introduce a physically delivered futures contract as part of its crypto venture called Bakkt. Chicago-based derivatives market Eris Exchange is opening a market that will also feature physically delivered contracts on some of the largest tokens.
CoinFLEX as part of its futures offer, it will make a big bet on Tether, one of the market’s most controversial tokens that has been dogged by speculation about whether its tokens are backed by the amount of dollars its founders have claimed. A Bloomberg News report last month that offered the clearest indication yet of Tether’s finances suggested such fears may be unfounded.
CoinFLEX’s contracts will trade against Tether, a cryptocurrency that is pegged to the dollar. That means at expiry, parties who are short will deliver Bitcoin and receive Tether, while for longs it will be the other way round. This mechanism is fundamentally different to that for cash-settled contracts at rival exchanges where gains and losses are paid out either entirely in dollars or Bitcoin, as a proxy for cash, based on an index price, he said.
