The first bitcoin futures depend on trading at the Winklevoss twins' tiny exchange - and that could be a problem

The first bitcoin futures depend on trading at the Winklevoss twins' tiny exchange - and that could be a problem


REUTERS/Stephen Lam

  • Cboe Global Markets' bitcoin futures product launches Sunday.
  • Cboe is basing its bitcoin futures contract on pricing on Gemini, the cryptocurrency exchange founded by the Winklevoss twins.
  • Bitcoin futures will allow investors to bet on the future price of the red-hot cryptocurrency.
  • But a number of concerns hang over Gemini including low volumes on the exchange and system outages.

All eyes will be on Cboe Global Markets on Sunday when it launches futures contracts for bitcoin.

The Chicago-based derivatives market is the first established exchange to roll-out futures for the red-hot digital currency. Futures are contracts that will let investors bet on the coin's future price.

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While bitcoin enthusiasts are excited about the attention - and big money - a new futures market could bring to the digital coin, concerns hang over Gemini, the cryptocurrency exchange Cboe is working with to launch the contracts.

Founded in 2015 by Tyler and Cameron Winklevoss, who reportedly own a billion dollars of bitcoin, Gemini is one of the best-connected firms in the cryptocurrency space.


But Gemini is still small, and trading in its price-setting auction is thin enough that it could be manipulated, according to critics. Cboe will be basing the price of its futures on this auction, which means any sudden shift in the set price could make the difference between a contract that is a money maker or a money loser.

Then there's the fact that Gemini has suffered outages when demand for bitcoin skyrockets.

Gemini tracks the overall market pretty closely with an average difference of just 0.01%, according to Cboe. The product was designed with one exchange to make it easier for traders to hedge their holdings of the underlying asset. And Cboe would rely on a backup index based on data from six exchanges if Gemini were to crash.

Gemini did not respond to an email seeking comment.

Smallest among rivals

Gemini is much smaller than many of its rivals in the bitcoin-trading space. Ranked fourteenth globally by 24-hour trading volumes, the exchange sees only 1.4% of trading in the entire bitcoin market, according to data from CoinMarketCap.


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Its size is concerning to some trading firms which don't like the idea of an entire market for futures being based on data from one exchange with thin volumes. The logic is, since Gemini is so small, its activity can't paint an accurate picture of the broader crypto-market.

Cboe's futures will be based on the auction price of bitcoin on the Gemini exchange. Settlements for the contracts, the payout a trader either receives or pays out for their bet, will be determined each day at 4:00 p.m. The first settlement is not set to occur until January.

"I'm concerned that the Gemini auctions often have very low volume and the lack of liquidity may lead to the futures settling at a price that is not indicative of where bitcoin is trading on other venues, due to the localized supply/demand imbalance in the auction," Garrett See, the CEO of DV Chain, the cryptocurrency trading arm of Chicago-based DV Trading, told Business Insider.

Market manipulation

John Spallanzani, the chief macro strategist at GFI Group, told Business Insider Gemini's low volumes could be a problem because it could lead to market manipulation.

"The lower the volumes, the easier to manipulate," he said. "Since the volume is low and [bitcoin] is unregulated it is conceivable."


"The last thing we want is another Libor-type scandal," he added, referring to a scandal in which banks rigged the price of the London Interbank Offered Rate to benefit their positions in the derivatives market. Banks have been fined billions of dollars for manipulating the rate, which provided the base for a loan market worth a $300 billion.

"This is one exchange which comprises a relatively small amount of bitcoin dollar traded volumes globally," Greg Dwyer, the head of business development at BitMEX, a bitcoin derivatives exchange based in Hong Kong, said, referring to Gemini. "So there are concerns that there could be adverse price movements due to this illiquidity or some bad actors in the space trying to move the price at settlement."

Such market manipulation would not easily get past regulators at the CFTC, the body that oversees futures in the US, according to Dwyer. It also wouldn't get by Cboe, which has information sharing in place and would watch for irregularities during the auction. As for Gemini, the exchange is required to know exactly the entities trading on the exchange during the auction because of Know-your-customer requirements by New York law.

Crypto-insiders are also concerned about Cboe's futures product. I Am Nomad, a popular crypto-trader who declined to identify his identity for fear of reprisal from his employer, shared his criticism of Cboe's futures contracts in a recent Medium post.

"The Gemini Exchange, while being a solid US-based exchange, makes up a very small percentage of the global volume," he wrote in a blog post. "More importantly, the auction itself sometimes has days where it has low volume or doesn't complete at all."


Dave Weisberger, CEO of CoinRoutes, told Business Insider Gemini's size is irrelevant. He said the design of Cboe's futures contracts embeds more certainty into the market. Here's Weisberger in a LinkedIn post:

"Using a single point in time auction to create the settlement price at expiration, has advantages. It is more deterministic (investors long bitcoin and short futures can precisely manage their exposure at expiration), and harder to manipulate."

Still, exchange clients appear to be concerned about Gemini's small command of the market. A person familiar with Nasdaq's futures contracts, which could launch as early as the second quarter of next year, told Business Insider clients of the exchange voiced their concerns about a product based on too few indexes. Nasdaq's bitcoin futures contract will track 50 indexes, whereas CME Group, Cboe's cross-town rival, is set to track four.




When volumes have increased on Gemini, the firm has faced challenges staying online.


Earlier this month, the firm showed many users a "504 Gateway Time-out" message, which means its servers were not responding to requests. The company posted on its status page that "systems are currently experiencing degraded performance."

The exchange also experienced outages lasting as long as 10 hours in August, according to reporting by Quartz.

"This is not the first scaling challenge we've encountered, and it won't be the last," Gemini said in a blog post. "We're continuing to improve our performance and infrastructure monitoring so we can anticipate potential problems more quickly in the future."

Outages in the crypto-world are commonplace, and Gemini is far from the only exchange dealing with such issues. See told Business Insider crypto-exchanges in a sense are still "websites" that lack "the industrial scale" of traditional exchanges. And with cryptocurrency volumes topping as much as $26 billion in a single trading day, exchanges and trading firms are under pressure to enhance their technology.

Read more about blockchain, the technology powering bitcoin, here.


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