They are known for providing professional bitcoin futures that do not have socialized losses, and while their volume is low compared to competitors OKCoin and BitMEX, they have been building a strong foundation for growth.
CEO Timo Schlaefer agreed to a Q&A so I use the opportunity to ask some questions about his new Turbo product, as well as bigger picture issues on the bitcoin derivatives industry in general and what CryptoFacilities will be doing in the future.
If you just want to invest in bitcoin, i.e. buy and hold, you won’t need derivatives. They are very useful however for frequent trading as fees are typically much lower than in regular spot trading. With futures you can also go short, i.e. profit from price declines. This also allows you to get rid of bitcoin risk that you may not actually want without selling your bitcoins. For instance, a bitcoin payment processor may need to hold a certain amount of bitcoins to run the business but may not want to have exposure to bitcoin. In this scenario, shorting a bitcoin Futures will remove this risk without selling the bitcoins.
Futures also provide interesting trading and arbitrage opportunities. Typically, they trade somewhat away from the bitcoin “spot” price, and this price differential can be locked in to make a low-risk profit. There is also the opportunity to trade the differential between different Futures on the same platform or across different platforms, or between Futures and the spot price.
BFG: The bitcoin community is buzzing about your collaboration with the world's largest derivatives provider CME Group to construct reference indices to bitcoin spot market. Can you tell us a bit more about this?
It is extremely exciting that a market leader such as the CME Group is taking an interest in bitcoin and we feel privileged to be working with them. Bitcoin is a pretty new asset class, and for this asset class to develop further we need reliable reference prices. Together with CME Group we are developing a methodology to provide a once-a-day reference rate that will be published at 4 p.m. London time, as well as a real-time index representing the current market price of bitcoin which will be published approximately once per second and is suitable for marking bitcoin-risky portfolios, executing intra-day bitcoin transactions and risk management.
We aim at bringing together all the major source of bitcoin liquidity and combining them in a transparent, robust and replicable manner. The daily reference rate will additionally be overseen by a supervisory committee of leading market participants and industry experts. So we hope than everyone will have a vested interested in these reference rates and that they become a universally trusted and used source for the bitcoin price.
BFG: Your new Turbo product has a Weekly and Biweekly contract offered where there's 50x max leverage. To an existing bitcoin speculator who uses OKCoin, BitMEX, CFD sites, or even Bitfinex and Kraken on margin trading -- what would you tell them about why they should be trading your Turbo futures contracts instead?
The order book of our front week Turbo generally provides a very good level of liquidity – in most market environments you should be able to buy or sell around 25 contracts (worth 25 bitcoins) 5 BPs away from the bid price. Our transaction fees are between 1 and 5 BPs, and we do not charge any fees for maintaining a position, which makes total fees very competitive. We also do not have socialized losses, so we will not see us seizing any of your equity in case your get stopped out.
BFG: On other exchanges, people have experienced that when one marketmaker monopolizes liquidity provision, the spreads can make it difficult for people to trade profitably on short-term moves. This results in a CFD-like experience for traders, in practice. How confident can your clients be that the liquidity that we currently see in the orderbooks of CryptoFacilities futures contracts, which is quite healthy, will not disappear and leave large spreads to trap them when theres some volatility?
TS: We currently have an average bid-spread spread of 8 to 10 BPs in the front week contracts of our Futures which we believe is very good. We have not observed the situation you describe and certainly would step in to prevent this from happening.
BFG: You and your exchange have had a certain opinion about high leverage products in the past. Can you explain how your philosophy on this has changed now with the Turbo product. And if not, do you consider Turbo "true futures" given that there is such a 2% initial margin requirement (50x)?
Crypto Facilities offers regulated trading products that satisfy professional standards. The bitcoin world runs a little different than traditional finance, and we accommodate for that to the extend we think our products are still safe to trade.
Our bitcoin Futures provides 6x leverage and has never experienced a credit event since it was launched 15 months ago. At the same time we recognize that there are market participants who seek higher leverage and are willing to tolerate a higher level of counterparty risk. For this use-case we have launched the Turbo Futures which provides 50x leverage. The Turbo does not in any way change the risk profile of your “regular” Futures trades as it sits in a completely independent margin account, so there are no cross-effects between both products. It also does not change the risk profile of Crypto Facilities as we are not a counterparty in the trades on our platform.
Also, we have spent a lot of effort on developing mechanisms to prevent price manipulation and self-perpetuating price moves on our market. Price manipulation is a major issue in bitcoin, in particular in bitcoin derivatives and it is essential to protect market participants against it.
BFG: BitMEX has recently made another strategic pivot in their product offerings by abandoning futures and collapsing them all into one "swap" product for each currency pair. Are there any plans or interest at CryptoFacilities in developing swaps or something similar that gives investors an ability to earn interest payments on their bitcoin rather than merely speculating on price and premium changes in futures?
We currently have no plans to offer this kind of product. The idea behind perpetual swaps is probably to simplify trading, but this comes at the expense of transparency and tractability. For instance, if you hold a swap for a certain time, you will not know in advance what your lending costs/profit are going to be since the interest rate changes continuously. With Futures there is no such issue as you lock in the price at the beginning of the trade, so you know what you get.
BitcoinFuturesGuide: New exchanges on the scene like Coinpit and CRIX are planning to offer futures with no socialized losses. You were one of the first to offer this product to bitcoin traders in early 2015. Do you think the socialized loss model is going to disappear over time when competing with termination products emerging like Turbo?
I am not a fan of socialized loss systems at all, they tend to be intransparent and create systemic risks and conflicts of interest. I would be very surprised if a regulator ever approved a socialized loss system. We believe that our termination system, which manages credit risk bilaterally between counterparties, is safer and easier to understand.
I don’t think there will be a universal move away from socialized losses though. There is always going to be a need for more casual, unregulated speculation, and this system seems to work well enough for that in most cases.
BitcoinFuturesGuide: You recently announced a partnership with Ripple, to offer derivatives solutions for traders in that market. How broad is your vision for products on CryptoFacilities? Will it remain a bitcoin-only website? Or will other cryptocurrencies be depositable? And plans for fiat integration?
We like XRP [Altcoin Ripple's currency code] and think that it has some very useful and unique characteristics. What is currently lacking is the ability to trade XRP in a more versatile way, for instance to put on a short trade to hedge your exposure, and we are working on creating this market.
We ultimately want to extend our product range to all major digital assets and permit deposits in various digital currencies and fiat.
BitcoinFuturesGuide: Former CFTC chairman Bart Chilton recently openly stated that regulations need to be more lax for crypto. There are currently no legal exchanges for Americans to trade bitcoin derivatives on. Bitstamp was able to achieve EU wide recognition as a normal (nonderivatives) exchange. CryptoFacilities has recently achieved FCA permission to offer the first regulated futures on bitcoin. How promising are such efforts at acquiring similar regulatory recognition in the US and EU?
It is exciting that we are now able to offer our bitcoin futures to retail and professional investors in the UK and other European countries in a manner that is compliant with FCA regulations. This is a global first and certainly a step towards a more mature market.
The regulatory hurdles in the US for derivatives trading are high, in particular if retail investors are involved, and certainly difficult to overcome for a company with limited financial resources. Unless there is some softening of digital asset-specific regulations, I’d predict that the US market for digital asset derivatives remains effectively closed for new fintech companies.