The high margins charged by the CME and Cboe for bitcoin futures, and the additional margins required by the futures commission merchants to trade the products, have turned the normal dynamics of futures trading versus cash trading upside down.
With the CME charging 47 percent margins, and some firms charging double margins on bitcoin futures, the cost of trading is nearly 100 percent of the underlying contract value. Normally futures contracts allow traders to control higher notionally valued contracts for much lower margin amounts.
Margins of 3 percent to 10 percent are the norm, depending on the commodity or instrument and volatility and other factors. For example, the initial margin for a speculator to trade corn at RJO is $605, as listed on their website. With the contract value for March corn at $3.74 per bushel as I write this for a 5000 bushel contract, the full contract cost is $18,700. That works out to be a little more than 3 percent for the margin for corn.
So, for 3 percent you can control a corn contract. With the same margins for corn as for bitcoin, you would need $8789 to trade a contract of corn at 47 percent margins or $17,578 to trade it at double the 47 percent margins.
On the other hand, to trade bitcoin in the cash market, you can buy a full bitcoin for the going price, or you can buy a fraction of a bitcoin for a lesser amount.
This means that you could buy just 500 bushels of corn if you wanted because you did not want more than about $2000 worth of risk. You are buying the cash bitcoin unlevered, so you would never get a margin call.
Now, as a true believer in the value of trading futures contracts, I will not equate the risks of trading cash and the risk of trading futures. But for many bitcoin investors and traders, the cash market is more accessible and affordable.
It would seem the CME’s five times the price of bitcoin futures contract needs to attract an institutional clientele due to the dynamics of the contract value and margins. However, the Cboe’s one times the index contract might not only be more affordable based on its value and margins, but also the focus of price discovery because of its more active contract.
What does work for both contracts is aggregating the bitcoin fractions traded in the cash market and hedging those against the futures.
An innovation I would like to see is for an FCM to launch a segregated account digital wallet for traders to be able to hold their bitcoin at a futures brokerage firm. If this were in place, then an exchange for physical or an exchange for risk market could be used as allowed by the CME to allow those playing arbitrage to move their cash bitcoin to futures, or vice versa. For the Cboe, in any exchange of contract for related position transactions “the related position portion of the transaction must be consummated through the facilities of Gemini.”
It would seem logical one could have an actual exchange for physical market if the FCMs held the cash bitcoin, or if it were held on their behalf by the exchange clearinghouse.
In the meantime, the dynamics of fractional bitcoin versus full value of the futures is a benefit to the cash markets and the principal trading firms playing the arb.