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Wednesday, September 05, 2018

I wanna be a billionaire so freakin’ bad --Bruno Mars

But I never got into bitcoin, so I missed the whole bitcoin billionaire boat.  Since late 2017, however, you too can get into the bitcoin game through bitcoin futures without touching the underlying cryptocurrency, if you dare.

Futures generally contribute to systemic risk because they multiply losses and rewards, but distinctive features of bitcoin futures raise concerns.  For example, bitcoin as a currency is not regulated like stocks and futures.  Such lighter regulation may allow for price manipulation.  There are also concerns about a bitcoin bubble.  This all contributes to bitcoin's volatility.

Bitcoin futures are still limited in number, which keeps their risk to the economy limited.   Earlier this year, for example, volumes in bitcoin futures at CME only averaged about 1,000 contracts per day.  However, their number can only grow to cause severe risk to the financial markets.

After considering their risks in a forthcoming Houston article, I offer several regulatory solutions in this new context.  I’m not sure the CFTC needs to ban them, however, like South Korea did.  Instead, one risk management option is to put a limit on the number of positions that may be held by any person.  Another is to require bitcoin futures traders to post significant margin deposits, which is collateral posted to protect the clearinghouse (the middleman in the trade) in the case of default.  Third, separate guarantee funds can be introduced for these trades to minimize the risk of clearinghouse insolvency.  In other words, the party who brings the risk should pay for the risk.  Fourth, tress testing should continue to be used in the bitcoin context by stress testing the positions at the clearinghouses. Finally, cybersecurity regulation should be considered related to bitcoin given its digital nature. 

Anything I’m missing?   

Posted by Margaret Ryznar on September 5, 2018 at 11:05 AM | Permalink

Comments

Got it, thanks.

Posted by: Margaret Ryznar | Sep 10, 2018 5:28:45 PM

Margarest , also here , you may find great interest in that doctrine :

https://www.reuters.com/article/us-cryptocurrency-dollar-paxos-winklevos/new-york-regulator-approves-winklevoss-paxos-dollar-linked-tokens-idUSKCN1LQ1O5?feedType=RSS&feedName=businessNews&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+reuters%2FbusinessNews+%28Business+News%29

Thanks

Posted by: El roam | Sep 10, 2018 1:20:35 PM

Very interesting--many thanks for all the links; I look forward to following up on them. I particularly find the Apple story interesting; I have been reading a lot about the logistics of bitcoin mining and how it's getting more difficult to mine as more people do it--and whether this form of security is even worth the huge electricity costs. There's definitely so much to think about.

Posted by: Margaret Ryznar | Sep 6, 2018 2:14:46 AM

Interesting and important indeed . I haven’t read the whole research , but It seems that you have missed maybe , the idea of “ sovereign cryptocurrency ” which by itself , can solve regulatory problems mentioned by you .

Here you may read on the

Petro (cryptocurrency) of Venezuela ( already laucned ) :

https://en.wikipedia.org/wiki/Petro_(cryptocurrency)

And here :

The Finance Ministry and Bank of Israel are considering issuing a digital currency, a possible response to the frenzied cryptocurrency and bitcoin craze , here :

https://www.jpost.com/Crypto-Currency/Israel-banking-on-digital-shekel-cryptocurrency-519902

P.S : There is also problem , with huge amount of energy needed for “ mining ” such currency . Apple recently , banned the mining of cryptocurrency on Iphones , due to it , here you may read :

https://www.businessinsider.com/apple-bans-cryptocurrency-mining-on-iphones-2018-6

Thanks

Posted by: El roam | Sep 5, 2018 12:41:28 PM

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