Derivatives and Shorting

For increased leverage or to take short position on cryptocurrencies, investors can trade futures contracts. Crypto exchanges such as BitMEX and ByBit allow traders to leverage their position in bitcoin by up to 100 times.(1,2) Bitcoin futures are also available on established exchanges such as the CME Globex electronic trading platform and TD Ameritrade. Cboe Futures Exchange also used to offer bitcoin futures, they announced in March 2019 that they will no longer be offering futures.(3) Their last futures contracts expired in June. Nevertheless, the crypto futures market has seen rapid development with the launch of new brokerage firms such as Bakkt, Seed CX and ErisX. In fact, all bitcoin futures have been cash-settled but Bakkt announced that they have gained approval from the Commodities Futures Trading Commission (CFTC) to offer physically settled bitcoin futures (4) and LedgerX is expected to follow.(5) LedgerX also offers bitcoin options and it serves as a central clearinghouse that takes full possession of the bitcoin underlying the options contract until the option is exercised or expires. These instruments have profound implications in the Bitcoin industry as they provide means for hedging against price risk, especially for bitcoin miners.(6)

Investors who are looking short alt coins can also approach OTC desks and broker-dealers, some of whom operate lending facilities, such as Blockchain and Genesis Capital.(7) Some alt coin developers holding large amounts of alt coins may also be willing to lend their coins to investors as well. Additionally, the number of peer-to-peer cryptocurrency lenders are also growing. Companies such as BlockFi, Celcius and DharmaLever, pay interest on cryptocurrencies and stable coins as high as 8.6% annually.(8) These companies generate revenue by lending out crypto assets stored with them to trusted institutions like hedge funds. Institutional investors can also consider borrowing cryptocurrencies from them.(9)



Joseph Lee

Research Analyst

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