Bankers To Launch A Derivatives Exchange

2015-02-27 03:57 PM | Sarah Cohen

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It was like a sign that bitcoin was done with its tumultuous teen years and ready to enter its adulthood. when the New York Exchange has announced its investment in Coinbase. which is a United States based bitcoin exchange and wallet service.

The ascension to its adulthood will be marked by high profile investors and an exponential growth in the ecosystem.

Former Goldman Sachs, Morgan Stanley, BNP Paribas and Societe Generale bankers, right after such a development that recently occurred, they announced a new derivatives- trading platform for bitcoin. Crypto Facilities .

Crypto Facilities is a newly launched London-based bitcoin derivatives trading platform. At present, the platform lets customers trade a forward contract on the bitcoin price only and offers the contract with 3 expiry dates. Trader can lock the price by selling, or shorting a forward.

The brokerage platform will specialize in future and options tied to the price of bitcoin and will enable businesses and investors to hedge their digital currency exposure.

The exchange is supported by co-founders who have immense experience in Londons traditional financial markets. Timo Schlaefer was the executive director at Goldman Sachs. He co-founded the firm with Jean-Christophe Laruelle, who used to create trading platform systems for Societe Generale and BNP Paribas.

Even though Schlaefer does not speak much about his time in Goldman, his contacts in high finance have helped a lot. The bitcoin derivatives market is still emerging. More than 800 contracts have been traded for the March forward while 550 contracts were traded for both forwards with later expiry dates.

TeraExchange are BitMEX considered among the best cryptocurrency derivatives issuers which registered with the US derivatives regulator. The chief operating officer at BTC.sx, Colin Kwan, says that growing trading volumes on derivatives exchanges should ultimately lead to more stable bitcoin spot prices.

He said, Just like the traditional markets going back to wheat and gold because of the volatility of the weather and things like that, it made commerce very unstructured. It was simple derivatives like forwards that actually normalised the market. When you start talking about big sums of bitcoin, big movements, then derivatives will reduce volatility and provide a lot more efficiency.

Crypto Facilities strategy is to take help from a regulatory host. Met Facilities LLP is the host. It is registered as a financial services company with the FCA. Met Facilities has made the new exchange an appointed representative. If there is any flaw by the exchange, the host will get the blow back from regulators.

To an extent, the arrangement is marketing Crypto Facilities as bitcoin does not fall under the FCAs purview. Schlaefer said, Bitcoin forwards are not part of the regulated activities per se. What we do is apply the same risk management and compliance framework [to bitcoin forwards trading.

A bitcoin derivatives company is only the first part of what Schlaefer expects to be a long involvement in crypto currencies.

He stated, Bitcoin is a special realisation of the blockchain technology. Whatever the new use of the blockchain technology will be, its probably going to be some crypto asset, some sort of virtual asset. If you have a framework for how to trade this asset, how to hedge risk and so forth, I think thats quite valuable.

Bhavesh Kotecha, who is a managing partner at Met Facilities LLP. mentioned that his company received queries from around 10 crypto currency firms last year. All of them were seeking regulatory hosting services, which indicates that this technique is a popular road to regulation for firms in United Kingdom.

Hedging Crypto Exposure

After the inception and meteoric rise of bitcoin, the biggest problem has been with volatility. The familiar refrain goes something like this: why would a merchant hold a currency that can fluctuate 10 to 20 per cent per day?

The answer is that they wont and dont. In spite of the logical answer, many have been confused by the decreasing of the price of bitcoin even as major companies like Dell and Microsoft have started to accept the digital currency.

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In a 30- day rolling average, when the merchant announces acceptance of bitcoin, there is an excitement at first, but then it falls. As the price of bitcoin increases, the number of transactions fall quite the opposite of the outcome that was expected.

One reason for this inverse relationship is because as new merchants receive bitcoins, they immediately covert them to flat currency.

DELL might have seen a large influx of purchases with bitcoin that were immediately converted to U.S. dollars to pay U.S. dollar expenses. Furthermore, the volatility of bitcoin has been a hindrance to mercants holding onto bitcoin.

That is why the announcement of a bitcoin futures- and- options broker is so exciting. Merchats will then have more options to avoid bitcoin exposure which will eventually lead to fewer merchants immediately converting to fiat.

In order, fewer conversions will seem likely to lead to a higher price and a virtuous cycle can commence. Derivatives can have a dampening effect on volatility which will encourage more businesses to accept and hold bitcoin.

As a quick aside to those who may believe derivatives are the cause of volatility not the solution, leverage causes volatility, not derivatives. Digital currencies or cryptocurrencies are quickly becoming a new financial asset class for investors, traders and businessmen.

The ecosystem is likely to grow at an exponential pace as the early adopters profitably hand off to the next wave of institutional investors.

By Sarah Cohen

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