Bitcoin Futures Will Drastically Increase Volatility

The rollercoaster ride that is Bitcoin has been epitomised in the last few days as the digital currency rocketed to the milestone of $10,000. Instead of bouncing off that target or consolidating, the second stage engine fired up, pushing the currency as high as $19,700 on one exchange. A correction followed, pushing the price down to $13,500 on the GDAX exchange.

While the drop made some investors jittery, particularly as every news agency under the sun calls Bitcoin a bubble, investors merely had to “hodl.” The launch of CBOE’s Bitcoin futures has caused another surge in the price of the digital currency, with the futures market overheating several times and trigger circuit breakers.

Some people simply cannot handle losses and are quick to cash out, but BitMEX CEO Arthur Hayes is warning that this ride is only going to get more wild with with an even bigger futures market opening in a week.

Enter old money

Futures are being hailed as the entry point for big money traditional investors to get involved with Bitcoin, but without getting their hands dirty (holding and securing the actual asset). It’s likely that there’s a great deal of Wall Street money about to enter the futures market, particularly when CME opens their futures trading on December 18. CME is significantly larger than CBOE. The current market cap of the entire cryptocurrency ecosystem exceeds $455 bln, but even that is a drop in the ocean in terms of the size of global markets. Thus, when Wall Street-type money enters the ecosystem, there is going to be some big waves.

Hayes explained:

“Initially, because of the way these contracts are structured, they will actually increase the volatility of Bitcoin.”

Instant liquidation

Why exactly will futures cause new volatility? There are a few high-level philosophical debates going on about potential market manipulation. But the structuring of futures on such an already volatile market could see the effect magnified. Hayes noted:

“Let’s take an example — the CME contract is closed over the weekend. So the price closes on Friday and reopens Sunday night just like any Globex futures contract. And it has a 20 percent upper limit and down limit, meaning the contract over a 24 hour period cannot trade 20 percent above or 20 percent below where it closed Friday at London 4pm time.

“Let’s take the Bitcoin Cash situation, the price of Bitcoin dumps 30 percent between Friday and Sunday. The CME contract opens limit down, so no one can trade. From the exchanges’ point of view you could possibly have a situation where you immediately open the exchange and a certain subset of traders are instantly liquidated because they don’t have enough collateral to cover the loss on that contract.”

There are also other issues that could contribute to rapid swings as well:

“You also have the fact that half of the exchanges in their index are extremely illiquid and have technical problems with handling even today’s load on their exchanges. You could see a situation where a malicious actor would DDOS the exchange and move the price before one of the settlement periods to affect how the futures contract trades or how brokers have to liquidate some clients. It’s going to be interesting to see.”

Time will tell

Indeed, the new CBOE futures market has already seen technical problems, as their website crashed on the opening of Bitcoin futures due to high demand. CBOE launched Bitcoin futures trading at 5 PM Central time and their website went down within minutes.

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