The shine of the Bitcoin has faded as the cryptocurrency market hit a slump early this year. Ever on the lookout for opportunities to multiply returns, many traders shifted their sights on crypto futures and derivative trading platforms after the cryptocurrency drop.
A future, also called a futures contract, “is an agreement to buy or sell a certain product on a fixed date.” A lot of people look at futures as the cryptocurrency market’s way into the traditional financial institutions, mainly because it offers more legitimacy and security. It is more secure because owning a future does not mean you need to own an actual coin, which gets rid of the risk of hacking and theft.
Futures exist within a well-defined legal and operational framework, as it offers transparent reference prices and increased liquidity. Those who were careful to trade crypto assets before because the market was essentially unregulated, have now found a safer space for their investments.
But many financial experts are not eager to jump into the bandwagon, and are still encouraging traders and investors to tread carefully. Specific regulations, they say, are still not firmly in place. This means greater risks and the possibility of eventual market chaos and huge losses.
There is always risk when you trade in a lightly regulated market because the environment is not as secure as traditional markets where investors enjoy protection through fixed regulation and policies. In a conventional futures market, for example, brokerages (not exchanges) are required to ensure their clients have sufficient margin deposits and that proper risk management and documentation are in place.
When the Chicago Board Options Exchange (CBOE) launched futures trading late last year, its rival Chicago Mercantile Exchange (CME) soon followed, which led to an increase in prices of both Bitcoin derivatives and the coin itself. Yet after the initial increase, Bitcoin prices went downhill.
Today, other crypto derivative exchanges like BitMEX, Bitfinex and EMX, among others, have started getting creative about their offerings. Not only that, many of them have come up with strategies to avoid control by authorities.
In China, for example, where authorities have stepped up monitoring by blocking access to offshore crypto exchanges that provide trading services to domestic investors, mainland investors are trying different strategies that make it impossible for authorities to shut down trading.
As a result, cryptocurrency trading is still popular as a number of China exchanges have registered themselves under different domain names, moved their servers abroad and registered their companies offshore.
Investment experts and authorities are concerned that risk management measures to prevent problems are not firmly in place. Additionally, all entities dealing in Bitcoin futures are required to be licensed for Type 2 regulated activity (which means they are dealing in futures contracts) under the Securities and Futures Ordinance. These are applicable for all businesses that target the Hong Kong public.
Only in July, an incident at Hong Kong-based OKEx led to a shortfall that ended up hurting the traders who had to give up 18 percent of their profits to cover the losses. OKEx has declared it would look into changing its “margin system and liquidation procedures so that clawbacks become less frequent.” (Socialized clawback mechanism happens when portion of the profit is taken from other traders, in equal percentage, to cover shortfalls.)
Look back on this story when you find yourself considering investing in crypto futures. There is nothing wrong with exploring new markets, but always do it with wisdom and foresight.