Price volatility is perhaps the primary concern for investors in the cryptocurrency market. Looking back to at Goldman Sachs prediction, Bitcoin was soaring to all-time high nearing $7,400 on November 8 and then suddenly declined to $6,170 on November 12, according to Coinmarketcap. The signature dips and spikes of bitcoin have become the heart and soul of Hodler’s the world over.
Trading Halts and Hard Caps
On October 31, Chicago Mercantile Exchange Group (CME) announced its plan to launch Bitcoin futures by the end of 2017. The derivative was initiated in light of growing investor interest in the emerging cryptocurrency market. Despite this interest, however, the high volatility of bitcoin value has kept many conservative investors at bay.
The CME, which counts among the most substantial futures exchanges in the world, will put a limit in place to prevent the higher volatility. CME’s price volatility limit would be very similar to a U.S. stock index future.
The limit will advise investors as to whether or not they should trade with bitcoin at a particular time. The CME group will do this by implementing trade halts. These barriers will keep prices from fluctuating more than seven to thirteen percent and prevent bitcoin from trading beyond twenty percent.
When a large price swing occurs, there will be a two-minute pause in which all bitcoin trades will cease. And alternatively, when the price fluctuates beyond 20 percent in a single day, then the hard cap will be implemented to avert trading on that particular day.
CME and The Wild West
It is not for the first time that CME has announced a limit of this nature. The previous perimeter was set for more traditional features of the stock market to avoid extreme volatility.
CME’s chairman emeritus, Leo Melamed, who founded Financial Futures, explained that his group would “tame” bitcoin. He stated that “[CME] would regulate, make bitcoin not wild, nor wilder. We’ll tame it into a conventional type instrument of trade with rules.”
Bitcoin price fluctuation is a common aspect of today’s market. It is CME’s intention, however, to get a better grip on this volatility. The group also announced their interest in trading futures as early as January 2018, which could signal a greater wave of acceptance in the financial sector.