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Little Guys and Big Trading Firms Square Off in Bitcoin Futures Arena

7 Jan 2018 12:00 pm
By Alexander Osipovich 

Small investors are betting that bitcoin's price will rise, while hedge funds and other large traders are betting it will fall.

That is the pattern rapidly emerging after four weeks of trading in the first U.S. bitcoin futures market, launched last month by Cboe Global Markets Inc. Futures are a type of contract that enables traders to wager whether the future price of an underlying asset will rise or fall.

For traders who hold fewer than 25 of Cboe's bitcoin futures contracts -- a category that likely encompasses many retail investors -- bullish bets are 3.6 times more common than bearish ones, according to the latest Commodity Futures Trading Commission data that cover trading through Tuesday.

At Cboe, the big players in bitcoin futures tend to be short, betting the future price will be lower. For instance, among "other reportables" -- large trading firms that don't necessarily manage money for outside investors -- short bets outweighed bullish "long" bets by a factor of 2.6 last week.

The CFTC has yet to begin publishing similar data on a competing bitcoin futures contract listed on the Chicago Mercantile Exchange, owned by Cboe's larger rival, CME Group Inc.

The early futures trading activity seemed to align with the perception of how big and small traders view bitcoin itself. Frenzied buying by retail investors world-wide helped power bitcoin's extraordinary rally last year. The digital currency surged about 1,330% in 2017 and was trading at $16,764.99 late Friday afternoon, according to CoinDesk.

Many skeptics on Wall Street have called bitcoin a bubble and would be more apt to bet on its decline. In a sign of how more conservative firms are keeping their distance, the CFTC data show near-zero trading in Cboe's bitcoin futures by banks and asset managers.

"There is probably more optimism in the retail segment than there is in the institutional segment," said Steven Sanders, an executive vice president at Interactive Brokers Group Inc., an electronic brokerage firm that offers its customers access to bitcoin futures.

With bitcoin futures, pessimists now have a way to attempt to profit from a price drop by going short.

Hedge funds and other money managers had placed almost 40% more short bets than long bets last week, according to the CFTC data. That represented a less bearish outlook than they had in late December, when such funds had more than four times as many short bets as long bets.

These numbers don't include bets made as part of what the CFTC calls "spreading" strategies, in which a firm is both long and short at the same time.

Shorting bitcoin futures doesn't necessarily mean a trader expects bitcoin to crash. A cryptocurrency trading firm with significant holdings of bitcoin might go short to hedge those inventories against a price fall. That would make the firm indifferent as to whether bitcoin goes up or down.

Going short could also be part of certain sophisticated trading strategies, such as betting that rival cryptocurrencies will outperform bitcoin. One such rival, Ethereum, rose above $1,000 for the first time last week, more than double its value from the beginning of December.

With the CFTC data, "you're not seeing the full picture," said James Koutoulas, chief executive of hedge-fund firm Typhon Capital Management, which trades futures in bitcoin as well as commodities. Typhon has swung back and forth, being long and short bitcoin futures at various times, Mr. Koutoulas said.

Analysts say Cboe's bitcoin contract is geared more toward small retail investors because CME futures require more cash upfront to trade.

Activity in Cboe's and CME's futures has been muted, especially compared to the booming market for bitcoin itself. The combined size of the nascent bitcoin-futures markets at the two exchanges was roughly $150 million on Friday, measured in terms of the value of outstanding contracts, while the total value of all bitcoins in existence was around $290 billion, according to coinmarketcap.com.

And at both Cboe and CME, the average number of bitcoin contracts traded each day has been below the level set on each exchange's first full day of trading on Dec. 11 and Dec. 18, respectively. Intense media hype helped fuel heavy trading when both contracts launched.

One factor behind the slow volume growth may be the reluctance of many Wall Street banks to touch bitcoin futures. Firms such as JPMorgan Chase & Co. and Bank of America Merrill Lynch haven't offered their clients access to bitcoin futures.

Write to Alexander Osipovich at alexander.osipovich@dowjones.com

(END) Dow Jones Newswires

January 07, 2018 07:00 ET (12:00 GMT)

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