Tiny $217 Options Trade On Bitcoin Blockchain Could Be Wall Street’s Death Knell (#GotBitcoin?)
The cryptocurrency industry isn’t replacing Wall Street just yet. But inventors and entrepreneurs are working on it, with some initial success, albeit modest. Tiny $217 Options Trade on Bitcoin Blockchain Could Be Wall Street’s Death Knell (#GotBitcoin?)
In this case, an option premium of 0.0202 bitcoin ($217 at the time) paid via a smart contract may have just become the proof of concept.
The latest target for blockchain disruption is options trading tied to the Standard & Poor’s 500 Index, the main benchmark for U.S. stocks. It’s a massive market, with roughly $400 billion of the options changing hands every day last year, on average.
Under the current setup, Wall Street firms typically execute the trades and handle the settlement afterward – essentially making sure the securities end up in the buyer’s account, and that the cash ends up with the seller. But for investors, the process can be expensive, due to the middlemen fees being charged, and slow, with settlement typically taking a day or two.
In July, Emmanuel Goh, CEO of London-based firm skew., a startup specializing in analytical tools for the crypto industry, says he came up with the idea of using the bitcoin blockchain – the decentralized computer network underpinning the decade-old cryptocurrency – to trade S&P 500 options.
Goh was previously a trader in London for JPMorgan Chase, the largest U.S. bank, where he slung options on auto, chemical, consumer and industrial stocks. In other words, the options market is an arena he knows well, at least in the traditional sense. Earlier this month, skew. (which spells its name with a period) announced $2 million in seed funding from several venture capital firms, including the Silicon Valley icon Kleiner Perkins.
The S&P options project was entirely experimental, Goh told CoinDesk – the challenge was mainly to see if it could be done. (The publicity probably doesn’t hurt, either.) Since the trade would essentially be automated via computer programming, it would be less expensive to conduct and settle a lot faster, maybe in just 10 or 15 minutes, according to Goh.
Goh said the technology that made it possible comes from Crypto Garage, a subsidiary of the publicly traded, Tokyo-based tech firm Digital Garage. Crypto Garage has developed an expertise in smart contracts, small strings of programming that can be encoded into the bitcoin blockchain to run when activated.
The transaction needed to cross on the bitcoin blockchain, Goh said, because it’s the most secure in the industry, even though smart contracts are generally considered easier to program on the ethereum network.
So on Sept. 6, Goh says, he took some British pounds from an in-house research-and-development fund at skew. converted those into bitcoin, and then used the proceeds to buy 10 S&P 500 call spreads – a popular type of option – from Crypto Garage, all under a new smart contract, with terms agreed to by both counterparties in minutes. The expiration date for the options was set for the third Friday of the month, similar to the standard practice on many exchanges.
At the outset, Skew. paid an option premium of 0.0202 bitcoin ($217 at the time) via the smart contract, and Crypto Garage posted 0.04667 bitcoin as collateral.
On Sept. 20, the expiration date, the smart contract automatically used a price feed from Atlanta-based Intercontinental Exchange (parent company of the New York Stock Exchange) to establish the final price for the S&P 500.
The trade went in skew.’s favor, resulting in a payout of 0.036 bitcoin ($365 at the time). Crypto Garage got 0.01 bitcoin of its collateral back. (Skew later sent some money back to Crypto Garage, as a true-up.)
Above is an image produced with data from the bitcoin blockchain – the trade settlement, at expiry. Initially daunting, it’s the elegant simplicity here that is the promise of a blockchain-driven future.
At the top, that string of letters and numbers in blue is the ID number for the transaction. On the left, the blue string is the address where the collateral is stored, and the white number is the amount of collateral, in BTC. On the right, the top blue string is the address of the winning counterparty in the trade, which got back the white number of bitcoin, and the blue address just below that is for the losing counterparty, which gets back the leftover collateral. In yellow, on the lower right, it shows that the transaction was confirmed 2068 times by the blockchain and then the yellow number of bitcoin is the total BTC proceeds distributed to the two counterparties from the collateral, after deducting the fees.
For GOH, the big takeaway from the exercise is that it worked.
“The trade settlement took 45 minutes to process, with total transaction costs equal to a few U.S. dollars,” he said. “The smart contract knows exactly how much the parties will get back.”
In theory, he says, the cost would have remained the same even if the notional amount of the trade had stretched into the millions or billions of dollars.
The important part, he says, is that “you don’t have all the intermediaries.”
Could the new process be scaled up to handle the volume of S&P options trades currently handled by securities firms? Probably not without improvements to the bitcoin blockchain’s processing capacity, Goh says. But a lot of programmers are working on doing just that.
In the annals of technological breakthroughs, it’s not exactly Ben Franklin hanging a key on the end of a kite. But the little $217 options trade might be a step forward in making financial markets cheaper and faster to use – with less Wall Street involvement.
New CME Bitcoin Options Spark ‘Unusually Strong Activity’ — JPMorgan
The United States’ largest bank believes interest will be high in CME Group’s new Bitcoin (BTC) options when they launch on Jan. 13.
In a note from Jan. 10 quoted by Bloomberg on Friday, a group of analysts at JPMorgan Chase led by Nikolaos Panigirtzoglou noted interest in CME’s existing Bitcoin futures had spiked in the run-up to the release.
“High Anticipation” of Bitcoin Options
On the shift in investor behavior, JPMorgan summarized:
“This unusually strong activity over the past few days likely reflects the high anticipation among market participants of the option contract.”
The events mark a contrast to the December launch of options from CME competitor, Bakkt, the analysts added, with volumes for that product staying “rather small.”
Overall, interest in Bitcoin futures has traditionally taken a long period to gather momentum. As Cointelegraph noted, Bakkt’s own launch in September mirrored CME’s debut in December 2017, both preceding an extended period of low volume.
The start of futures trading further came in advance of a Bitcoin price drop, the absence of which could distinguish next week’s options launch.
A Taste Of Market Impact To Come?
While JPMorgan did not link last week’s uptick in futures activity to BTC/USD performance, the pair nonetheless made significant gains, rising 15% from $7,300 last weekend to local highs in excess of $8,400.
Theories circulating among commentators also attribute the strong performance to geopolitical uncertainty centered on Iran.
In a separate Bloomberg interview on Jan. 8, Sonny Singh, chief commercial officer at cryptocurrency payment processor BitPay, said even a small segment of new investors coming into Bitcoin was enough to move the market more decisively.
Noting both the Iran crisis and the participation of companies such as Fidelity Investments, Singh added he forecasts Bitcoin breaking its all-time highs of $20,000 in 2020.
CME’s Options On Bitcoin Futures Pass Regulatory Approval And Go Live
The Chicago Mercantile Exchange (CME) has received necessary regulatory approval and has launched its new Bitcoin (BTC) futures options as of today, Jan. 13.
According to the official website of CME, the new type of Bitcoin derivatives contract — Bitcoin futures options — is now live, which comes in line with the company’s plans announced in November 2019.
CME’s Bitcoin Futures Options Was Subject To “Regulatory Approval” Earlier In The Day
Specifically, the launch of CME’s Bitcoin futures options follows regulatory approval that the exchange received earlier today, as reported by Cointegraph. As of press time, the approval notice has gone from the website, which apparently means that regulators have given the green light.
CME, one of the first exchanges to host Bitcoin futures contracts — alongside the Chicago Board Options Exchange back in 2017 — first announced its plans to introduce options on Bitcoin futures on Nov. 12, 2019. According to CME, the new product was announced in response to growing interest in cryptocurrencies and customer demand for tools to manage Bitcoin exposure.
Crypto Derivatives Market Continues To Surge
The news comes amid Bitcoin futures traders reportedly generating at least $20 billion in daily volume last week. According to aggregate volume data for Bitcoin futures products by analyst Skew Markets, global futures trading volume exceeded $20 billion on Jan. 8 alone.
Meanwhile, CME is purportedly the third global derivatives player to launch trading for options on Bitcoin futures. The exchange was apparently beaten by cryptocurrency derivatives exchange FTX that reportedly quietly launched Bitcoin options trading on Jan. 11.
As reported by Cointelegraph, the Intercontinental Exchange (ICE)’s digital asset platform Bakkt has become the first exchange to launch Bitcoin options in the United States.
According to estimates, crypto futures trading volume reportedly amounted to almost 50% of the value of spot trading on crypto markets as of late October 2019.
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