The opening of the LedgerX platform creates the possibility of large-scale trading among traditional financial institutions.

Normalization.

 Photographer: Sean Gallup/Getty Images

Last week may be remembered as the turning point when cryptocurrencies joined the mainstream financial system, as the clearing and trading platform LedgerX 1  opened for business. About 20 institutional investors — including investment banks, asset managers, hedge funds and proprietary-trading shops — executed bitcoin forward and option trades at narrow spreads and without difficulty. This creates the possibility of large-scale trading among traditional financial institutions supporting both the vastly increased use of the currencies in business and their inclusion as an asset class in investment products from pension funds to hedge funds.

But before anyone gets too excited, remember that activity on LedgerX seems to have been limited to tests, 2  176 trades from Oct.16 to 20 represented only $1,000,000 of notional value. Will institutions take advantage of their new capability to trade bitcoin in size either for their own accounts or to offer crytocurrency-linked products to their customers? If so, LedgerX has plans to introduce longer-dated contracts and Ethereum and possibly other cryptocurrency swaps and options.

As expected, most of the interest is in the day-ahead bitcoin swaps, and 170 of these were traded. Bid/ask spreads were impressively tight, $5 on a $6,000 notional contract. Six bitcoin options traded, four calls and two puts with $5,600 strikes at implied annual volatilities of 80 percent and 77 percent respectively. This is considerably smaller than more than the 100 percent historical annualized volatility of bitcoin, and the even higher implied volatilities that option buyers have had to pay on unregulated exchanges.

To the extent we can extrapolate from small-volume transactions, they suggest LedgerX, which won Commodity Futures Trading Commission approval in July to offer options, could make bitcoin both more liquid and more stable. Institutional cryptocurrency trading has been held back by the absence of a clearing facility and fragmented liquidity among unregulated exchanges that do not all adhere to modern best practices of settlement, information security and legal compliance. 3

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