The demand for exposure to cryptocurrency has reached a level where Bank of America has started to allow clients to trade Bitcoin Futures. Previously, Bank of America has been leery of allowing clients to trade Bitcoin futures contracts as the volatility of these products is elevated. The move by Bank of America to allow crypto trading followed the news that Goldman Sachs and Morgan Stanley started offering Bitcoin funds to their clients in the Q1 of 2021. Sources say that Bank of America will be using the Bitcoin futures offered by the Chicago Mercantile Exchange (CME) launched in 2017. Bank of America is conservative in its approach to the crypto sector. Sources say that due to a large amount of margin required to trade the futures, it is now allowing access to some clients.
What is a Bitcoin Futures Contract?
A futures contract is the obligation to purchase an asset at some point in the future. There are two types of futures contracts. There are financially settled contracts that require that the buyer receives the difference between the purchase price and the selling price. There are also physically settled futures contracts. If you sell this type of futures contract and hold it into the settlement period, you might be required to deliver the physical underlying assets to the buyers at a specific location on a certain date.
Bitcoin futures contracts are financially settled futures contracts. Each futures contract that is purchased holds the obligation to buy 5 Bitcoins. The CME lists six consecutive futures contracts which are followed by the next 2 December contracts. The minimum price fluctuation is 5 bitcoins. The Chicago Mercantile Exchange also offers Ether futures contracts as well as Bitcoin mini-futures contracts. The difference between the Bitcoin futures contract and the mini-Bitcoin futures contract is the size of the contract and the dollar amount per minimum fluctuation.
Why is Bank of America Comfortable with Bitcoin Futures Contracts?
Bank of America has taken a conservative approach to allow clients to trade Bitcoin. The futures contracts are helpful because they provide investors with credit protection, using a margin account. A margin account allows an investor to use borrowed capital to trade enhanced volumes without having to post the entire value of the futures contract.
To begin futures crypto trading, you will need to open a futures account, and your broker will first go through the process of knowing their client. This process is relatively standard in the investment industry. It provides a way for an investment advisor or facilitator to understand the risk tolerance of their potential client.
The next step would be to set up a margin account and see if you have the money needed to trade the product that you would like to access. A margin account uses the equity that you have in your account along with the futures contracts you purchase as collateral. The CME will measure the expected change in the price of the futures contract and requires a margin that will protect you and all other futures traders from the changes in the price of the futures contract.
Bank of America feels comfortable given the elevated levels of margin that are required by the CME. The CME in September of 2021 requires that futures traders post an initial margin of 37% of the value of the futures contract. For example, if the price of Bitcoin is $47,000 and each contract is 5 Bitcoins, then the value is close to $235,000 and the initial margin is $86,000. This value of the initial margin is geared to protect against an adverse move of $86,000. The CME also requires that traders post maintenance margin. Once there is a change in the price of the Bitcoin futures contract, your broker will require that you post a margin to cover any additional losses. If the equity in your account reaches a level where your futures broker believes that you could lose more than your initial or maintenance margin, they will issue a margin call. This margin call is a request for more capital in your account. Most futures brokers reserve the right to liquidate the positions in your account if you do not comply with the margin call.
The Bottom Line
Bank of America has moved forward with providing some of their clients with access to Bitcoin trading via the futures market. Sources state that they are using the Chicago Mercantile Exchange. Bank of America has taken a conservative approach to crypto trading and appears to be comfortable using futures contracts because of the size of the margin that is required to trade Bitcoin futures contracts. Futures contracts can help protect traders and brokers bu making sure each participant has enough capital to offset any losses that could incur while trading these products.