At the time of writing, bitcoin prices were touching $15,000 having previously hit a high of $17,000 intraday. The cryptocurrency is seemingly unstoppable at this point and could well be the biggest bubble of our lifetime.
The latest price increase is wild and comes as the CME and CBOE prepare to launch bitcoin futures next week. This development is likely to bring a new dimension to the bitcoin market and no-one knows how it will pan out.
Numerous respected economists and investors have expressed deep concern over the true value of bitcoin and some believe the cryptocurrency could even pose systemic risk to the financial system.
Interactive Brokers CEO Thomas Petterfy went as far as to take out a full page ad in the Wall Street Journal warning the CFTC of a catastrophe in the making:
“If the Chicago Mercantile Exchange or any other clearing organization clears a cryptocurrency together with other products, then a large cryptocurrency price move that destabilizes members that clear cryptocurrencies will destabilize the clearing organization itself and its ability to satisfy its fundamental obligation to pay the winners and collect from the losers on the other products in the same clearing pool.”
According to Petterfy, exchanges and brokerages could come under financial stress if they don’t take necessary precautions and set margin requirements at the right levels.
A Catastrophe In The Making?
Let’s be clear. No-one really knows what will happen when bitcoin futures launch.
We could possibly see an IPO type situation where we see a big pop on the open and then a prolonged decrease in prices.
We might also see a reaction similar to the launch of Uranium futures which led to true price discovery and a steady downward trend.
Surely, we are going to see some very erratic and volatile trading.
The Trade – Short CME And Brokerage Firms
The point of this article, however, is not to speculate but to try and identify a trade with a good risk: reward.
We have already discussed the spread in GBTC and now we are looking at the two key exchanges in this story.
Take a look at the charts of CME group and CBOE and you will see that both stocks have been powering ahead in recent weeks. They are up around 19% on the quarter.
If Petterfy is right and cryptocurrencies cause a financial destabilisation, firms like CME and CBOE could incur heavy losses and their stocks could tumble.
Feasibly, the companies could even face bankruptcy and have to be bailed out when their stocks run to zero.
This is obviously a small probability but it is large enough to give traders a positive risk:reward skew.
On the one hand the launch of bitcoin futures might go smoothly, meaning a boost in revenue for CME and perhaps a stock increase of 10%.
On the other hand, we could see a potential financial system meltdown and then a catastrophic stock decrease of 50-90%.
That is what makes shorting CME a positive risk:reward trade in our view.
Obviously, this is a high risk trade and this short article cannot represent the entire risks and rewards of the trade in question. We are not currently short any stock mentioned but may initiate a short position in the next 24 hours.
Thank You For Reading
Joe Marwood is an independent trader and the founder of Decoding Markets. He worked as a professional futures trader and has a passion for investing and building mechanical trading strategies. If you are interested in more quantitative trading strategies, investing ideas and tutorials make sure to check out our program Marwood Research.
This post expresses the opinions of the writer and is for information or entertainment purposes only. It is not a recommendation or personalised investment advice. Joe Marwood is not a registered financial advisor or certified analyst. The reader agrees to assume all risk resulting from the application of any of the information provided. Past performance, historical or simulated results are not a reliable indicator of future returns and may not account for real world settings. Financial trading is full of risk and margin trading can lead to financial losses totalling more than what is in your investment account. We take care to present accurate analysis but mistakes in backtesting and presenting of analysis regularly occur. Please read the Full disclaimer.
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