Bitcoin exchange BitMEX have announced the introduction of a futures contract for Bitcoin, in a much-needed shot in the arm for the cryptocurrency who fortunes have been ebbing lately.
Bitcoin has been disappointing over the past few days. Just when it was announced that it was the worst-performing currency in all of 2014, then now comes the news that it has slumped below the psychologically critical $300 mark. We are now talking about $270 support levels, and it would be safe to say that even the most ardent bit-believer must be skipping a heart bit (pun intended) right now, if not on the verge of an outright coronary.
But there is a ray of sunshine in the announcement today by BitMEX, a leading Bitcoin derivatives exchange that they have launched the world’s first 30-day Historical Volatility Futures Contract or BVOL.
It is a product that will allow traders to speculate on the 30-day historical volatility of Bitcoin against the US dollar as observed on Bitfinex. Traders will be able to profit on the increase or decrease of Bitcoin price volatility without taking a position in the exchange rate.
BitMEX has constructed a 30-day historical volatility index. The index takes the daily 1-minute Time Weighted Average Price or TWAP for Bitcoin / USD on Bitfinex between the hours of 10:00 – 12:00 GMT. Each daily value represents the realized volatility over the past 30 days. The futures contract on the settlement will be equal to the index value on that day.
The futures contract expires on the last Friday of every calendar month at 12:00 GMT and is quoted in annualized volatility percentage points. A futures price of 50.00 corresponds to an annualized volatility of 50%. For each percentage point movement, traders will either make or lose 0.01 Bitcoin.
The futures contracts will be margined the same as all other BitMEX futures contracts. In commodity trading, you are likely to hear about futures margin quite often. Futures margin is simply the amount of money you have to put up in order to control a futures contract. Futures margin rates are decided upon by the exchanges themselves, in this case, BitMEX. Sometimes, the exchanges may add extra premiums on the rate so as to cover their exposure to risk.
To illustrate, let us take an example from the stock market. If you were to trade stocks on up to a 40% margin, it would mean that you could buy up to US$100,000 worth of stock for only US$40,000.
BitMEX has two kinds of margins. The first type is the Initial Margin which is the percentage of the value of a contract at the order price that must be kept in equity in order to open an order. The rate is 30% to which are padded an entry commission and an exit commission. The second type is what is known as the Maintenance Margin, which is the percentage of the value of the contract at the current price that must be kept in equity so as to maintain the position. The BitMEX rate for this is 20% plus exit commission.
The initial leverage will be up to five times. Trading on leverage means that a trader would be able to buy the Bitcoin Futures contract on credit as it were. Let us take the previous example from the stock market, in which the margin requirement of the stock was 40% or US$40,000. The remaining US$60,000 would be considered as the leveraged amount. Though they have the perception of being risky, leveraged trading is often used by professional traders as it allows them to trade more contracts with less trading capital.
BitMEX’s BVOL is, therefore, an indication that Bitcoin is maturing as a trading commodity something that both the SEC and the CFTC have openly or tacitly acknowledged.
Images from BitMEX, jabiru, and Shutterstock.