The Intercontinental Exchange’s highly anticipated bitcoin futures contract mustered just $5 million of total trading – and its daily product traded fewer than five contracts across its first week.
According to the exchange’s Bakkt division, set up last year by the Atlanta-based company as a new marketplace for digital assets, some 623 monthly bitcoin futures contracts changed hands last week. Both the monthly and daily contracts debuted on Sept. 23.
Each of Bakkt’s futures contracts represents one bitcoin, so the total trading volume works out to just over $5 million, based on the current price of $8,322.
By comparison, some 4,099 bitcoin futures contracts traded on Friday alone at rival Chicago-based exchange operator CME, whose market opened in 2017. And the CME’s futures contracts represent five bitcoins, for a trading volume of $165 million on the single day.
Bakkt’s daily futures contracts fared even more poorly, with fewer than six contracts trading throughout the first week.
Executives at Bakkt had touted the new contract as a milestone for the cryptocurrency industry, catering to big institutional investors that have thus far been slow to buy bitcoin and other digital assets.
According to the exchange, the new offering should appeal to institutional investors like hedge funds and other money managers because bitcoin must be delivered to fulfill the contract’s terms when the maturity date arrives. That feature has been touted as a key advantage for asset owners who want to hedge their portfolios, in contrast with the CME’s contract, which is settled via cash payments but has become popular with individual investors.
Dave Weisberger, CEO of CoinRoutes, a New York-based company that helps investors route cryptocurrency trades to various exchanges, says that bitcoin investors currently in the market already have plenty of places to buy and sell, but it’s too early to write off Bakkt’s new push, he said in a phone interview.
“It takes time for people to move from one place to another, unless there’s a cost reason or a liquidity reason,” Weisberger, a veteran of Wall Street firms Citigroup and Morgan Stanley, said in a telephone interview, adding:
“These things tend to develop slowly.”
Damon Leavell, a spokesman for Intercontinental Exchange, said in an email that there was “strong industry participation” during the first week of the new bitcoin contract.
The contract maturing in October, he said, had the “tightest bid-offer spreads in the market, which was an exciting achievement.”
Wall Street analysts look at the so-called bid-ask spread – the gap between what buyers are offering to pay and what sellers are offering to accept – as a gauge of how efficiently a market is operating.
- Bitcoin has dropped more than 25 percent in the third quarter, neutralizing the bullish setup on the monthly chart.
- With the weekly and the three-day charts biased bearish, the cryptocurrency risks falling to $7,500 in the short-term. A violation there would expose the next major support, currently at $7,070.
- A corrective bounce may be seen before an extended sell-off to $7,500-$7,070, as the 4-hour chart is reporting a bullish divergence of the relative strength index.
- A break above July’s low of $9,049 is needed to invalidate the bearish setup on the long duration charts.
Bitcoin (BTC) is again flashing red, having hit a 3.5-month low earlier today and is on track to post the first quarterly loss of 2019.
The top cryptocurrency by market capitalization fell to $7,715 at 04:50 UTC today – a level last seen on June 11 – and is currently changing hands at $7,980 on Bitstamp, representing 2 percent losses on a 24-hour basis.
More importantly, BTC is currently down more than 25 percent from July 1’s opening price of $10,759. This is the first quarterly loss since the final three months of 2018.
Back then, the cryptocurrency had dropped by 44 percent, as seen in the chart below.
- Bitcoin’s two-quarter winning run is set to end with a double-digit price drop.
- The 27 percent slide witnessed in the July-September period is the second-biggest third quarter loss on record, the first being the 55.78 percent drop registered in the third quarter of 2011.
- Prices rallied 10.9 percent and 162.69 percent in the first and second quarter, respectively.
The long-term technical charts had turned bullish following the second quarter’s triple digit price rise and many observers were convinced that BTC may see a brief correction in the third quarter before challenging record highs near $20,000 in the final thee months of 2019.
The cryptocurrency did see a pullback to $9,100 in mid-July, having hit a high of $13,880 at the end of June and traded largely in a sideways manner around $10,000 in the following eight weeks.
With non-price metrics like hash rate hitting record highs, BTC was widely expected to chart a strong bounce from $10,000. Instead, the cryptocurrency dived below the psychological support last week and hit lows below $8,000, weakening the long-term bullish case, as seen the charts below.
BTC created consecutive inside bar candlesticks in July and August, signaling indecision in the market place or consolidation.
September’s red candle marks a bearish follow-through to the consolidation. Essentially, the sellers have come out victorious in a tug of war with the bulls.
The bearish inside bar reversal would be confirmed if prices close today (UTC) below $9,049 – the low of the first inside bar (July). With BTC currently trading at lows below $8,000, a bearish close is pretty much confirmed.
The latest monthly candle has poured cold water over the optimism generated by April’s falling channel breakout. Moreover, a similar breakout in October 2015 had paved the way for a solid two-year bull run.
The bearish outlook would be invalidated if and when prices rise above $9,049.
Weekly and 3-day charts
BTC closed well below $9,533 on Sunday, confirming a double top breakdown on the weekly line chart (above left).
The breakdown has opened the doors for $7,500 (target as per the measured move method). Supporting the bearish case is the below-50 print on the relative strength index (RSI).
Meanwhile, the three-day chart (above right) indicators are also reporting bearish conditions. For instance, the RSI is hovering below 50 and the 5- and 10-candle MAs are trending south.
Further, the 5- and 50-candle MAs have produced a bearish crossover and the 10-candle MA is about to cross below the 50-candle MA.
With odds stacked in favor of the bears, a drop to the 200-candle MA, currently flatlined at $7,070, looks likely.
Daily and 4-hour charts
BTC failed to take out the 200-day MA on Saturday, as expected, and fell back to 3.5-month lows earlier today.
Essentially, BTC created a lower high at the key MA, reinforcing the bearish view. The daily chart RSI continues to report oversold conditions, but would gain credence if and when signs of seller exhaustion emerge on the price chart.
However, on the 4-hour chart, the indicator is charting higher lows, contradicting lower lows on price. That bullish divergence indicates a corrective bounce could be seen before the drop to $7,500-$7,070, as suggested by the long duration charts.
Corrective rallies, if any, will likely face stiff resistance of the 200-day MA at $8,415.
Bitcoin (BTC) is like any other asset class in that it captures value through organic price discovery conducted via trading activity on global exchanges.
Yet leverage and margin trading, in general, can help “turbo-charge” demand for an asset. They can also free up capital, thus increasing liquidity within a given market as traders look to use their capital elsewhere.
It’s an investment strategy of using borrowed money for the use of various financial tools to increase the potential return of an investment.
It’s also an efficient use of trading capital, valued by professionals because it allows them to trade large positions without committing 100 percent of their capital to a risky spot position.
For example, a trader that wanted to buy a thousand tokens at $1 apiece would only require a $100 of trading capital, depending on the leverage used, thereby leaving the remaining $900 available for additional trades.
Why leverage matters for bitcoin
Often touted as the most liquid cryptocurrency asset available, BTC benefits from leverage and margin trading activity by allowing investors and traders to lock in a position while maintaining a portfolio of other cryptos. It also provides professionals and retail investors with additional tools to capture value in the crypto market. In effect, greater demand on the asset class vastly improves the potential for more accurate value capture through organic price discovery.
Participating in a live panel discussion at Invest: ASIA in Singapore, Lennix Lai, financial market director at OKEx told Coindesk:
“If you can only buy or sell particular underlying tokens of bitcoin and you don’t have the capability to short, basically speculate in another direction, then the market would be a lot more volatile because it would be entirely driven by sentiment.”
“For example, you can view bitcoin as being much more volatile before CME Futures were introduced … so we should have more financial instruments like options to assist further in the price discovery process in relation to volatility,” he said.
Greater access to capital means greater liquidity, without actually increasing the number of traders in a given market. It provides a means for increasing capital inflow without attracting any new money.
And while the total market capitalization of the crypto market has been on the slide alongside declining total volume, the pressures from a bear market can be offset through leverage and margin trading.
What’s the risk?
Of course, the rewards don’t come without inherent risks, as a loss can lead to the liquidation of a trader’s capital and force spot prices lower. Such an event recently took place in BTC’s futures market on Sept. 24 triggering a “long squeeze“.
If the cryptocurrency underlying a trade moves in the opposite direction to what was expected, leverage can greatly amplify the potential losses. To manage the risk associated, traders usually implement a strict trading style that includes the use of stop orders and limit orders designed to curb potential losses.
Also speaking on the panel in Singapore, Sunny Ray, head of global business development at the Kraken crypto exchange, explained how exchanges protect themselves from that risk:
“If there’s a lot of volatility in the market, if the value of the asset drops below 20 or 30 percent, there is something called a margin call that takes place where a company will actually liquidate the customer’s assets to cover some of those losses.”
There are currently eight major exchanges that offer the ability to leverage crypto, with several others offering margin trading accounts such as Kraken, Binance and Deribitm, while Bakkt’s release of its futures product on Sept. 23 adds to the opportunities for more authentic price discoveries.
Bitcoin fell sharply on Tuesday, confirming a bearish reversal and opening the doors for a test of crucial price support near $7,500.
The leading cryptocurrency by market value ran into selling pressure around $9,700 in the early U.S. trading hours and fell to a 3.5-month low of $7,998 at 19:45 UTC on Bitstamp.
The price slide was likely exacerbated by a long squeeze, when investors square off (or sell) long positions to cut losses in a falling market, thereby creating further downward pressure on prices.
So, while a price drop was expected, the magnitude of the sell-off has caught many by surprise. The cryptocurrency fell by 11.83 percent on Tuesday – 2019’s third-biggest single-day drop, as per Bitstamp data.
- BTC has seen double-digit daily losses four times this year.
- The biggest single-day loss of 2019 witnessed on June 27 marked a healthy correction from a 17-month high of $13,880 reached on the preceding day.
The latest double-digit price slide has taken the cryptocurrency below major support levels. Therefore, a deeper drop toward $7,500 – a level seen a week ahead of Facebook’s launch of Libra – could be seen over the next few days.
As of writing, BTC is changing hands around $8,400 on Bitstamp. It’s worth noting the cryptocurrency is still up about 127 percent on a year-to-date basis.
Daily and monthly charts
Bitcoin dived out a three-month contracting triangle on Tuesday (above left), confirming an end of the bull market, which had started from April’s low near $4,000.
Currently, prices are flirting with the 200-day moving average (MA) support at $8,309. That long-term MA has come into play for the first time since April and will likely be breached, as the post-triangle breakdown price drop looks to have legs – volumes hit three-month highs on Tuesday.
BTC, therefore, risks extending losses to support at $7,500 – lows seen before Libra hype gripped the market in mid-June
Moreover, the triangle breakdown could yield a drop to $4,000 (target as per the measured move method), as tweeted by bitcoin skeptic and CEO of Euro Pacific Capital Peter Schiff. That target looks far-fetched, however.
The monthly chart (above right) is also now teasing a bearish reversal. The cryptocurrency charted inside-bar candlestick patterns in the previous two months, signaling an impending bullish-to-bearish trend change.
The outlook as per the monthly chart would turn bearish only if prices close below $9,049 (first inside bar’s low) on Sept. 30. That looks likely, with prices currently trading at $8,400 and the daily chart reporting a strong bearish setup.
The bearish case would weaken if prices find acceptance above $9,097 – a higher high created on May 30. The outlook would turn bullish if prices bounce from the 200-day MA and chart a quick V-shaped recovery to levels above Tuesday’s high of $9,782. That, however, looks unlikely.
BTC has found acceptance below the 55-candle exponential moving average, which served as a strong base during the 2016-2017 bull market.
Back then, the cryptocurrency charted bullish higher lows along the key EMA and not once did the sellers managed to secure a close below the crucial support.
Hence, the latest close below the 55-candle EMA could be considered a strong bearish development.
Oversold daily RSI
The 14-day relative strength index (RSI) is currently hovering below 23, its lowest level since November 2018. A reading below 30 indicates oversold conditions and suggests scope for a corrective bounce.
That said, indicators can and do remain oversold for a prolonged period in a strong bearish market, especially when a sell-off is preceded by a major bout of consolidation. BTC was trapped in a narrow range for almost three months before breaking lower.
In such situations, seasoned trades consider an oversold reading on the RSI as an indicator of trend strength. So, expecting a notable price bounce on the basis of the oversold reading on the RSI could prove costly.
Bakkt is finally here.
After two delays and 13 months of questions, the Intercontinental Exchange-backed bitcoin warehouse and futures contract facilitator is launching Monday, opening the door for institutional investors to take positions on the cryptocurrency in a federally regulated venue.
Trading is set to open at midnight UTC and close at 22:00. For the first time, interested observers will be able to see just how much pent-up demand there is among big-money traders for this hotly anticipated service. Bakkt’s data feed will be freely available through June of next year, after which it will require a subscription, according to a company FAQ.
As often noted, Bakkt’s futures will be physically settled, meaning buyers receive bitcoin at expiration, whereas the futures available since 2017 at the Chicago exchange CME Group are cash-settled – essentially side bets on the cryptocurrency’s price.
But what may be most unique about ICE’s bitcoin futures contracts is that they expire after a day. According to the daily contract’s specifications, the bitcoin will be delivered on the second business day after the contract’s date.
For most commodities – frozen concentrated orange juice, cocoa, what have you – the underlying asset is typically not delivered for at least 30 days (although ICE also offers one-day contracts for silver and gold).
While Bakkt is also offering a 30-day bitcoin futures contract, the one-day version will essentially allow institutions to buy or sell bitcoin in a way that’s more familiar to them than the helter-skelter world of crypto exchanges.
“The dailies make their offering like the cash market, but with the ability to short. That’s huge.”
The contract is “well-designed,” Sarumi added. “The basis to the cash market would be very tight. It’ll be interesting to see if it’s the lead or the follower. In theory the cash market should dictate the price of the derivatives [futures] market. In practice, it’s the other way around for a lot of commodities.”
For this reason, Sarumi said he believes the daily contract “will come out of the gate strong.”
That being said, it is unlikely that ICE’s new futures contracts will have a significant near-term impact on the general crypto market, particularly given the company is not looking for retail customers, who make up the bulk of traders still.
Bakkt anticipates significant institutional demand for its futures contract, though it remains to be seen how significant it actually is.
“We could see decent trading volumes for the product,” said John Todaro, director of research at TradeBlock, a provider of institutional trading tools. “I would expect, however, that the demand would be somewhat in line with current cash-settled contracts, such as those offered by the CME.”
Trading volumes for derivatives contracts traditionally outpace trading volumes seen in the underlying spot market, Todaro told CoinDesk.
“As the digital currency space continues to mature we should see an increase in volumes for these products relative to spot over time,” he said.
However, it is unlikely that there will be an immediate surge in demand. Institutional adoption won’t occur with a single catalyst, Todaro said, adding:
“It will take time for these entities to become comfortable with the asset class, identify strategies that are best used to trade the space, understand crypto market liquidity, and also understand the different regulatory and tax obligations across jurisdictions they operate in.”
It is unclear how much bitcoin has been sent to Bakkt since the New York Stock Exchange’s sister company opened its warehouse up for customers to deposit bitcoin on Sept. 6. Each customer must pledge a minimum $3,900 of assets in collateral to purchase a contract. (Speculators must pledge nearly $4,300.)
Bakkt has not disclosed any addresses for its custodian’s wallet or said how much bitcoin has been deposited since the warehouse opened this month. A spokesperson did not answer questions about the matter by deadline.
Caveats aside, ICE launching futures contracts is a significant move for the industry. Todaro noted that “traditional financial institutions are quite conservative.”
“The offering demonstrates that more and more Wall Street institutions are taking a close look at digital currencies and want to gain exposure to this new asset class,” he said.
It is possible that “some of the recent positive market moves across digital currencies have been from traders acting on the Bakkt launch,” Todaro said.
Bakkt’s launch may be a positive sign for other highly anticipated products in the U.S., such as a bitcoin exchange-traded fund (ETF). Last week. Securities and Exchange Commission (SEC) Chairman Jay Clayton expressed concerns with the cryptocurrency market’s maturity.
Derivatives products, like futures contracts, are more tightly regulated than the underlying spot market, and may be more comforting to regulators and potential institutional customers alike.
“This offering, in addition to the CME’s, can help regulators become more comfortable with digital asset trading and market infrastructure.”