DD Support Board and Research Team

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Bitcoin Futures Launch Stokes Fears of Manipulation, Hacks, Glitches

Cboe’s new bitcoin futures are set to start trading Sunday evening

By Alexander Osipovich and Gabriel T. Rubin Dec. 10, 2017 7:00 a.m. ET
https://www.wsj.com/articles/bitcoin-futures-launch-stokes-fears-of-manipulation-hacks-glitches-1512907201

Bitcoin fans are cheering the imminent launch of futures on the digital currency. But critics say the new market could be roiled by hacks, technical snafus or manipulation schemes.

Trading of the first U.S. bitcoin futures is set to begin at 6 p.m. ET Sunday on an exchange run by Cboe Global Markets Inc., while its larger rival CME Group Inc. plans to introduce its own bitcoin futures a week later.

One risk, critics say, is that the underlying markets for bitcoin are largely unregulated and have a troubled history. Mt. Gox, once the largest bitcoin exchange, collapsed in 2014 after being robbed of more than $470 million worth of bitcoin. Other bitcoin exchanges have faced criminal charges of money laundering.

“The Bitcoin cash markets are immature, and hardly seem the epitome of robustness,” Craig Pirrong, a finance professor at the University of Houston, wrote in a blog post last week. “Behemoth futures contracts could be standing on spindly cash market legs.

The shaky foundations of the bitcoin market add uncertainty to a market already known for wild gyrations. Bitcoin exchanges have been plagued with glitches and choppy trading in recent weeks, even as the price of the virtual currency hit record highs—passing $17,000 on Thursday, up from just $968.23 at the start of the year, according to CoinDesk.

For their futures products, CME and Cboe are betting that a handful of bitcoin exchanges are sufficiently reliable and trustworthy to support a derivatives market.

CME is using four of them—Bitstamp, GDAX, itBit and Kraken—to produce a daily bitcoin price index, which its futures would track. Cboe is using one, Gemini, founded by the brothers Cameron and Tyler Winklevoss.

All five of those exchanges have taken steps to embrace regulation and anti-money-laundering laws. Representatives of the bitcoin exchanges said the industry had matured and bolstered its security.

“Exchanges that weren’t up to a certain standard, due to incompetence, have died out,” said Bitstamp Chief Executive Nejc Kodric.

Still, recent mishaps have raised questions about whether bitcoin exchanges are ready for prime time. On Nov. 29, heavy trading sparked by bitcoin breaking through $10,000 the previous evening caused outages at Bitstamp and GDAX, among other exchanges.

CME’s index suffered a “calculation error” that day and had to be corrected, according to a CME spokeswoman. CME was still able to collect data from its partner bitcoin exchanges, she said, but declined to elaborate on the causes of the error.

Some critics warn that unscrupulous traders could push around the price of bitcoin on the bitcoin exchanges, manipulating prices in the underlying market in order to reap profits from the futures.

“Bang-the-settlement type manipulations are a major concern,” Mr. Pirrong wrote. “Relatively small volumes of purchases or sales could move the price around substantially.”

Compounding fears, the bitcoin exchanges partnering with CME and Cboe account for a narrow slice of the market. That means a manipulator wouldn’t need to move the price of bitcoin world-wide, but just on a small number of exchanges.

CME’s four partner exchanges together handle roughly 10% of daily global bitcoin volume, according to coinhills.com, although they account for around one-third of bitcoin trading in dollars, which CME argues is the more important measure.
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https://www.wsj.com/articles/bitcoin-futures-launch-stokes-fears-of-manipulation-hacks-glitches-1512907201