Bitcoin: Margin Call Or Capped Risk


By Darrell Martin

The Bitcoin competition is now in full swing. CBOE started things off last week when it traded the first cryptocurrency futures contract. Now the CME (Chicago Mercantile Exchange) began trading Bitcoin futures Sunday evening. Although both are trading Bitcoin futures contracts, there is one similarity, but several differences. Let’s examine those and then see how they compare to trading Bitcoin Spreads on Nadex.

Similarity Both CBOE and CME are cash settled since neither exchange literally holds any actual Bitcoins. There will be nothing delivered at settlement.

Differences Symbols: The CME is using BTC and CBOE is using XBT.

Pricing: CME averages four different cryptocurrency exchanges to arrive at their contract price. CBOE uses one price from the Gemini cryptocurrency exchange.

Contract Size: Each CBOE contract represents one coin. A CME contract is equal to five Bitcoins.

Margin: After much fluctuation, CBOE has settled at requiring 44 percent margin. When one Bitcoin is worth $18,000, overnight margin is $7,920. If a clearing firm is utilized, 50 percent is the average requirement. CME has a lower percentage of 35 percent. However, due to the larger contract size, the dollar margin to trade it will also be larger. Since the CME contract is five coins, the same $18,000 price for one coin will have a theoretical value of $90,000 for each contract. The margin of 35 percent is $58,500 for one contract of five bitcoin.

Size Per Tick: CME tick value or the minimum price movement is five dollars per bitcoin. With five coins per contract, that totals $25 per tick per contract. CBOE has set a minimum tick for a directional non-spread trade at 10 points of $10. A spread tick size is $0.01. A non-spread trade is defined as the absence of concurrent long and short position trades.)

Some are suggesting the possibility of an e-mini Bitcoin product. Comparing a big S&P 500 to the e-mini contract, the ratio is five-to-one. CME is five. CBOE is one. Even a mini contract can be out of reach for most traders, especially considering the amount of volatility seen in Bitcoin futures trading recently.

Nadex (North American Derivative Exchange) is regulated by the CFTC (Commodity Futures Trading Commission) in the US giving traders limited risk and transparent pricing. Trading Bitcoin spreads at Nadex allows traders to trade the price of Bitcoin within a range, between a floor and ceiling price. Just as the price of Bitcoin moves up and down, the value of Bitcoin Spreads moves as well, but with limits. The price of the underlying Bitcoin is based on the TeraBit Index. Since traders are trading the price of Bitcoin and not actual Bitcoin, no product will be delivered at settlement. It is also cash settled.

Suppose the underlying price of Bitcoin moved above the ceiling or below the floor of the range of the spread. The value of the spread stops moving. It remains at its upper or lower limit. This range, with its floor and ceiling, limits the risk and reward of the trade. Depending on whether the trade is bought or sold, one limit is the profit target while the other is guaranteed protection against unlimited loss.

No margin is required. Traders cannot lose more than the amount put up to enter the trade. Another advantage is the ability to exit the trade at any time provided there is an opposing buyer/seller. Traders are not locked into positions until expiration.

Tick value is $0.50 with minimum increments of $5.00. Expiration occurs weekly on Fridays at 3:00 PM ET. The range of the contract varies depending on the value of the underlying market. At this time, there is only one contract offered each week.

Trading Nadex bitcoin spreads allows more traders to participate in the Bitcoin Phenomenon because there are no margin requirements. Risk and reward are known upfront with the protections built in on short-term positions trading the price of Bitcoin. Traders are not buying or selling the actual Bitcoins. There is no “mining” or risk exposure outside of the comfort level of the trader.

For traders anxious to experience the thrill of trading Bitcoin, Nadex Bitcoin spreads offer the retail trader better volatility protection without the large risk. Demo accounts are also available where traders can practice skills before risking real money.

Sources: Nadex Investopedia Trading Advantage Daily