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
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
Gemini tracks the
overall market pretty closely with an average difference of just
0.1%, according to Gemini data. 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
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
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
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
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
“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 share his
true identity for fear of reprisal from his employer, shared his
criticism of Cboe’s futures contracts in a recent Medium
“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
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.
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
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.