Bitcoin Rally Fuels Market In Crypto Derivatives (#GotBitcoin?)
New structured products draw concern as digital currency climbs back above $10,000. Bitcoin Rally Fuels Market In Crypto Derivatives (#GotBitcoin?)
Wall Street has dreamed up an array of derivatives tied to stocks, commodities and mortgages. Now such contracts are being developed for bitcoin.
In recent months, some cryptocurrency firms have begun touting structured products linked to the price of bitcoin, with complex formulas determining how much they pay out.
It is still a small market, and the firms say their products aren’t aimed at mom-and-pop investors. But the trend is raising red flags among some market veterans, especially as bitcoin’s rebound above $10,000 has rekindled investor interest in the digital currency.
Craig McCann, a former Securities and Exchange Commission economist, warns that it is a bad idea to take bitcoin—a highly volatile, speculative asset traded on unregulated exchanges—and use it as a building block for complex instruments.
“There are all kinds of problems associated with any structured product tied to bitcoin,” said Mr. McCann, who now leads Securities Litigation & Consulting Group, a firm that provides expert witnesses for companies involved in securities lawsuits. “It doesn’t belong in anybody’s portfolio.”
Cipher Technologies, a crypto hedge fund in Greenwich, Conn., began offering structured products on bitcoin earlier this year. The firm has done several such deals, mainly with entities that manage money for wealthy families and individuals, said Cipher’s founder and managing partner, Gerald Banks.
“We would not fathom pushing this to anyone who would not be fully versed in the risk or in the nature of the underlying asset,” said Mr. Banks, who helped develop Merrill Lynch’s structured-products business in the 1990s and early 2000s.
One of Cipher’s products is a bond-like contract known as a reverse convertible. In such a deal, the client loans money to Cipher in return for monthly interest payments, with Cipher paying back the loan once the contract expires. But before then, if bitcoin falls below a predetermined level—a 19% drop, in one version of the product from earlier this year—then Cipher returns the principal to the client, minus the amount bitcoin has lost.
KuCoin Launches Bitcoin Derivatives Trading With 20x Leverage
IDG-backed cryptocurrency exchange KuCoin has just launched a platform offering crypto derivatives trading.
Announced Monday, the KuMEX trading venue is now live in public beta and will offer initially a bitcoin perpetual contract (XBTUSDM), quoted in U.S. dollars, with up to 20x leverage.
Aimed to make pricing “more fair and rigorous,” KuCoin said, KuMEX uses a bitcoin spot index providing a volume-weighted average of the U.S. dollar price of bitcoin across six exchanges: Coinbase Pro, Bitstamp, Kraken, Gemini, Liquid and Bittrex.
The spot index also avoids a contract being liquidated “because of the low liquidity of the trading platform or the large price fluctuations of one or two spot exchanges,” the exchange explained.
KuMEX offers some protection from risk with an insurance fund it says is “fully transparent,” with the balance to be disclosed on the platform each day.
“This fund ensures that investors who are forced to close their positions will not lose money that exceeds their position margin,” according to the announcement.
Should the insurance fund turn out to be insufficient to cover losses, KuMEX also has an “auto-deleveraging” system, said to be less “inflexible” than settlement via more standard socialised loss mechanisms.
To encourage new retail investors to get involved with crypto derivatives, KuMEX is offering a lower investment threshold than found at some other providers.
“The XBTUSDM contract value is 1 USD, which enables traders to make a more flexible investment. At the same time, KuMEX offers a negative fee for Makers at a rate of -0.025% with a certain amount of fixed commission, encouraging users to provide liquidity to the platform through making the market and earning some commission as an incentive,” says KuCoin.
KuCoin CEO Michael Gan said:
“Compared to the spot market, derivatives are much riskier due to the leverage used, so we are more cautious in providing such services. KuMEX is a derivative trading platform independently developed by our team, and from its inception, we have positioned it as a genuine and advanced financial product, so that all users can trust the platform and trade on it freely, without worrying about the loss caused by any form of manipulation. ”
After the full launch of the platform, 50 percent of net KuMEX revenue will be assigned for distribution to holders of the exchange’s token, KuCoin, the release states.
Last November, the Singapore-based exchange raised $20 million in Series A funding from investors including IDG Capital, Matrix Partners and Neo Global Capital.