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‘The bottom line’: Moment of truth for bitcoin

AFTER a weekend of violent price swings, bitcoin investors on Monday were bracing for the volatile cryptocurrency to begin trading on a major US exchange for the first time.

At 6pm New York time - 10am Sydney time - the Chicago Board Options Exchange (CBOE) began trading in bitcoin futures, causing the price to spike by more than 8 per cent in the space of seven minutes, from $US14,509 to $US15,732, according to research site CoinDesk.

But within minutes, the CBOE website appeared to have crashed under the load.

Bitcoin futures, which allow investors to bet on the rise or fall of the digital currency, have been hailed by supporters as an important milestone and could trigger a flood of institutional money - but what the ultimate impact will be is anyone's guess.

"No one really knows, is the bottom line," said IG Markets chief strategist Chris Weston.

"The sort of people who are going to be trading are not necessarily going to be the sort who have traded bitcoin before, who have mostly been retail investors and people with less financial market experience than what you would see with normal products.

"You can make the argument this will bring a new wave of participants into the markets.

"There's been a bit of whippy price action over the last couple of days, which could be more inducive of short-selling."

The CBOE futures are based on the auction price of bitcoin on the Gemini Exchange, which is owned and operated by the "bitcoin billionaire" Winklevoss twins Cameron and Tyler. The Chicago Mercantile Exchange (CME) will launch bitcoin futures next week.

Earlier, CBOE said it has taken precautions to address wild fluctuations, such suspending trading for two minutes if bitcoin prices went up or down by 10 per cent.

"We are committed to continue to work closely with the CFTC to monitor trading and foster the growth of a transparent, liquid and fair bitcoin futures market," the CBOE told Agence France-Presse.

The Futures Industry Association has criticised the US regulator's approval of bitcoin futures. In an open letter to the Commodity Futures Trading Commission last week, the FIA said the process had been rushed through without proper industry consultation or consideration of the risks.

"A more thorough and considered process would have allowed for a robust public discussion among clearing member firms, exchanges and clearinghouses to ascertain the correct margin levels, trading limits, stress testing and related guarantee fund protections and other procedures needed in the event of excessive price movements," the FIA said.

Bitcoin has exploded in value by 1500 per cent this year to reach a market capitalisation of more than $US260 billion, leading to growing warnings of a bubble.

Its exponential rise has been punctuated by knuckle-whitening periods of volatility. The cryptocurrency lost more than 23 per cent of its value over the weekend, plunging from a fresh all-time high of $US17,117 on Friday to bottom out at $US13,153 on Sunday.

On Saturday, the world's largest bitcoin exchange caused consternation among its 13 million members with email update warning users there "may be downtime which can impact your ability to trade".

"Despite the sizeable and ongoing increases in our technical infrastructure and engineering staff, we wanted to remind customers that access to Coinbase services may become degraded or unavailable during times of significant volatility or volume," the email said.

"This could result in the inability to buy or sell for periods of time. Despite ongoing increases in our support capacity, our customer support response times may be delayed, especially for requests that do not involve immediate risks to customer account security."

Mr Weston said that email "caused a bit of angst" and may have partly contributed to the weekend's sell-off. "It caused people to say, 'What if we can't get out of our positions?'," he said.

"It's had a really good run last week and is going to be subject to these fairly violent drawdowns in price. We know the implied volatility in bitcoin is significantly higher than any other market - if something can rally 20 per cent in a week, it can easily kick back as well."

IG Markets has offered a bitcoin CFD (contract for difference) product since 2012, which allows investors to get in on the action without having to own bitcoins directly. Mr Weston said the interest from clients over the last three months had been "absolutely staggering".

"It's been huge," he said. "To be able to trade bitcoin using a CFD is far less cumbersome than having to set up a wallet, and Coinbase [and other exchanges] have gone down a few times so being able to trade the underlying price is quite appealing to people.

"We've seen mostly on the long side, but we are starting to see some interest in people wanting to use CFDs to short bitcoin. That's been quite effective over the last 24 hours."

frank.chung@news.com.au

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