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Analysis: Bitcoin will start futures trading, stoking Wild West's worries

NEW YORK (Reuters) – Bitcoin fans are salivating over the potential for long-awaited legitimacy for the cyptocurrency when futures trading begins this weekend, but experts worry that the risks associated with the Bitcoin's wild nature can outshine the debut.

PHOTO OF THE FILE: A copy of the bitcoin foot on the PC motherboard is seen in this illustration, October 26, 2017. REUTERS / Dado Ruvic / Stock Photo

The first bitcoin future exchanges will begin Sunday at 6 pm EST (2300 GMT) in Cboe Futures Exchange of Cboe Global Markets Inc, followed a week later by CME Group Inc & # 39; s CME.

Nasdaq Inc plans to enter the mix next year, Reuters reported.

While Cboe, CME and Nasdaq offer tightly controlled business environments, the underlying market for bitcoins is riddled with cryptographic exchanges that lack even basic supervision.

That has stoked the fears of market manipulation, inaccurate prices and systemic risk for clearing houses.

"I am somewhat surprised by what happened in the last three months," said Richard Johnson, an analyst at Greenwich Associates, owner of digital coins and considered a bitcoin bull. "I worry that things move too fast."

Bitcoin's more than 10-fold increase this year has prompted bubble warnings from JPMorgan Chase & Co CEO Jamie Dimon, who called it "A fraud" that will eventually explode. Others, such as Wall Street adviser Tom Lee, expect the bitcoin to exceed $ 100,000.

On Wednesday, its hypervolatility was in full display as it broke $ 13,000 for the first time on the Luxembourg-based Bitstamp stock exchange, jumping more than 11 percent on the day. Since August 2011, Bitcoin has averaged a daily price change of almost 3 percent, up or down, compared to an average daily change in the cross rate between the US dollar and the euro of less than 0.5 percent since the euro debuted in 1999.

"Maybe it's the most unique market that's going to keep growing forever and for everyone to make money and it's a great thing, but I've been here long enough to know that that is not going to work so well, "said John Lothian, CEO. from the consulting firm John J Lothian and Company.

As a virtual currency, bitcoin can be used to move money around the world without the need for a central authority, such as a bank or a government, which is a double-edged sword, said Steve Grob, director of group strategy in Fidessa.

"There is no protection, if suddenly everyone decided tomorrow that bitcoin was not worth anything, it would be useless, and I'm not sure if people really thought about it," he said.

Traditional banks remain skeptical of dealing with bitcoin exchanges. Earlier this year, Wells Fargo & Co stopped processing wire transfers for an exchange called Bitfinex, which made it impossible for customers to transfer US dollars from their accounts, except through a special agreement with the bankruptcy attorney. the bag.

Even so, new participants, from retail investors to high frequency merchants, have piled up in bitcoins. Coinbase, based in the United States, said it added 100,000 accounts in the three-day Thanksgiving holiday in the United States, for a total of 13.1 million.

PHOTO OF THE FILE: A Bitcoin logo is seen in an advertisement for an electronics store in Tokyo, Japan, on September 5, 2017. REUTERS / Kim Kyung-Hoon / Stock Photo

If the market of Futures exceeded the size of the spot market, with a current daily trading volume of around $ 6 billion per day, the underlying price could be more susceptible to manipulation, said Kevin Zhou, co-founder of Galois Capital cryptocurrency fund.

"You've seen these problems before in bitcoin futures, where right before the deal, the price sets it high or low and then bounces right after," he said.

RISK OF A & # 39; AVALANCHE & # 39;

As volumes increase, there are also doubts about the strength of technology in bitcoin exchanges, Lothian said.

"Particularly when talking about a high frequency approach to this, where people try to make multiple exchanges."

Last month, the Gemini bitcoin exchange, which will set the price of the Cboe futures contract, and GDAX and Kraken, two of the four exchanges in the CME bitcoin index, had system problems.

"Every bitcoin exchange receives and receives complaints from users due to the incredible increase in the price of bitcoin and the result it has on capacity," Christina Yee, Kraken's representative, told Reuters recently in an email.

Kraken is planning to launch a new commercial engine "soon" that should increase the capacity of the exchange, Yee said.

The volatile nature of bitcoin could also present a risk to clearinghouses, said Thomas Peterffy, CEO of Interactive Brokers Group Inc.

Clearinghouses act as intermediaries between the parties to futures transactions. If there was a wild price swing in Bitcoin and a smaller broker did not comply with its margin request, the clearinghouse would have to take over the position, further moving the price of Bitcoin, which could cause other brokers to fail said Peterffy.

"If that happens at a time when the bitcoin increases for some crazy reason, there could be an avalanche," he said.

Questions like these have kept some futures market operators on the sidelines, for now. Intercontinental Exchange Inc., owner of the New York Stock Exchange and ICE Futures in the US. UU., He chose not to join CME and Cboe in the race to be the first with a bitcoin future.

"We did not think it was obvious to launch a product and be the first and set ourselves against an index in many exchanges that are not particularly transparent," ICE CEO Jeffrey Sprecher said this week at a Goldman Sachs conference. . .

Information of John McCrank and Anna Irrera; Edition by Dan Burns and Lisa Shumaker

Our standards: The Thomson Reuters Trust Principles.

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