In brief
- The CFTC has approved Bitnomial’s application for a bitcoin derivatives exchange.
- Initial products will be Bitcoin futures, mini Bitcoin futures, and Bitcoin options.
- All contracts will be physically settled in Bitcoin.
Chicago-based Bitnomial today got the nod from the US Commodity Futures Trading Commission to launch a Bitcoin futures and options exchange.
Contracts on the exchange will be physically settled, meaning customers receive the actual Bitcoin on a contract’s expiration as opposed to cash.
User-acceptance testing—the last phase of testing before the platform is production-ready—on Bitnomial will kick off on April 27. After that, trading will be subject to “customer readiness,” Luke Hoersten, Bitnomial CEO, told Decrypt.
Bitcoin futures, mini Bitcoin futures, and Bitcoin options will be available to trade once the futures curve stabilizes, he said. As the name implies, “minis” represent a fraction of the value of standard futures. Products trade on a minimum of 37% margin.
According to a product page, Bitnomial’s Bitcoin futures will see a contract size of 1 Bitcoin (roughly $7,000 at current prices), with quarterly contracts. Deci Bitcoin contracts will see a contract size of 1/10 bitcoin ($700 at current prices), also with quarterly contracts.
Cash vs. physically settled markets
Bitcoin derivatives have been available in the US since December 2017, when CME and Cboe both launched cash-settled Bitcoin futures. That was back when Bitcoin trading was fast and furious, and the price of Bitcoin hit an all-time peak of nearly $20,000.
Cboe put the brakes on its Bitcoin futures listings amid slumping volumes in March 2019. Meanwhile, CME Group has seen consistent demand.
Still, cash-settled contracts offer some advantages. With these contracts, you don’t have to actually own Bitcoin to dabble in the markets. When contracts settle in Bitcoin, this comes with the added responsibility of operating your own Bitcoin wallet and maintaining your own keys.
That may explain why physically settled Bitcoin futures in the US are less common. The Intercontinental Exchange’s Bakkt was the first to step into those waters, launching its much-touted physically settled Bitcoin futures exchange in September. ErisX, the trading platform backed by brokerage house TD Ameritrade, followed, launching its physically settled Bitcoin futures trading in December. Unlike Bakkt and Bitnomial, however, ErisX is fully collateralized and does not offer margin trading.
The trading volume on Bakkt has been bleak in recent months. According to Bakkt’s data, not a single Bitcoin options contract was traded in the week ending on April 17.
But Bitnomial believes it’s approach will be different.
“While there have been a few attempts at cash-settled futures in the US, there has been only one attempt at margined, physically delivered futures on Bitcoin in the US. But there are many different decisions and nuances to building a successful product, especially with crypto-related products,” Hoersten said.
Bitnomial was founded in late 2014. Two years later, it filed an application with the CFTC to operate an exchange, formally known as a designated contract market for deliverable digital asset derivatives. It has taken four years to get that approval.
The company is backed by $7.5 million in funding, from investors including Jump Capital, Coinbase Ventures, DV Chain, RRE Ventures, Digital Currency Group, ValueStream Ventures, Indicator Fund, and our individual investors.
Hoersten’s dream is to democratize Bitcoin, but he wants to go about it differently then CME and Cboe.
“Instead of trying to fit Bitcoin into the legacy financial system by making it look like a traditional financial product, we're embracing the unique benefits digital assets bring to the clearing and settlement industry,” he said. “We're not looking to fit a square peg into a round hole.”