By Darrell Martin
Bitcoin is buzzing in all the latest news. But how affordable is it to trade? CBOE Global Markets launched its Bitcoin Futures product on Sunday. CME Group will start its own Bitcoin Futures contract on December 18. Both utilize XBT Futures, which is cash-settled. However, they use different ways to arrive at the settlement price. CBOE derives a daily price auction from the Winklevoss twin’s exchange ran Gemini trading. CME is using data from four exchanges to track Bitcoin in a real-time price index.
A visit to each website offers some information on trading Bitcoin Futures. CBOE explains that Bitcoin Futures are available for trading on the CBOE Futures Exchange (CFE) with all transaction fees for XBT Futures being waived in December. CME offered a press release outlining their trading of Bitcoin.
What does it cost to trade Bitcoin? CME and CBOE have initial requirements of 35 and 44 percent with one brokerage reporting a margin requirement on long positions of at least 50 percent. With Bitcoin currently trading equal to nearly 18,000 USD, trading the minimum one bitcoin contract on CBOE would require over 19,000 USD. CME trades five bitcoins per contract, which would require an initial requirement of 58,500 USD and a margin of at least 45,000 USD for a total 103,500 USD.
Volatility Reading the news on Bitcoin will reveal its volatility. It is a cryptocurrency as an asset class being thwarted by bad press. It seems any news regarding Bitcoin can cause its value to fluctuate. Bitcoin’s intrinsic value has varied perception. Traders cannot predict how useful this asset will be in the future. Those holding large amounts of the currency are not clear how to liquidate without substantially moving the market.
Avoid Margin Calls and High Initial Requirements Nadex, the North American Derivatives Exchange announced on December 7, they would begin offering Bitcoin Spreads at 6pm ET Sunday, December 17.
Trading Bitcoin Spreads on Nadex will allow retail traders the opportunity to take short-term positions with capped risk and reward built in. The Bitcoin Spread’s value will vary within the floor to ceiling range as the price of Bitcoin moves up and down. As with all Nadex Spreads, traders are protected from losses above the ceiling and below the floor. Profits occur from price action within the defined floor-to-ceiling range.
At this time, with the insane volatility of the market, Nadex will only begin by listing one weekly Bitcoin Spread. The contract will be one-tenth (1/10) the per point value of the underlying. Therefore, a 10,000-point floor-to-ceiling range will have a total value of $1000.
Opening an account at Nadex can be done with as little as $250. However, each bitcoin spread contract currently has a value of $1400, so more will be required in an account than $250 in order to trade Bitcoin Spreads. It will not be as steep of a premium as trading Bitcoin Futures.
There is never a margin call with Nadex. Risk and reward is known upfront before a trade is entered. There is also no risk of being locked in a trade when circuit breakers are triggered as mentioned in Bitcoin Release and Circuit Breakers.
As of December 7, Nadex Bitcoin Spread Demo contracts are already available under Cryptocurrency in their finder, giving traders a chance to experiment with trading Bitcoin Spreads before going live.
Nadex’s Bitcoin Spread’s underlying price will be derived from the TeraBit Index, which has been published by TeraExchange since 2014. This data comes from 10 underlying bitcoin spot exchanges. The TeraBit Exchange was created to meet the CFTC requirements.
Being able to trade Bitcoin Spreads on Nadex will make it possible for individual retail traders to trade this popular, yet volatile asset with defined risk and affordable capital requirements.