With The Cryptocurrency Market Historically Tumultuous, Regulated Futures Brokers Like EdgeClear May Offer More Security Than Their Spot Counterparts

Jacob HarrisMay 8, 2024

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By Austin DeNoce, Benzinga

The cryptocurrency market has been a rollercoaster of innovation and growth, but it's not without its share of pitfalls. National Futures Association (NFA), the self-regulatory organization for the U.S. derivatives industry, does not have regulatory oversight of the spot virtual currency. This lack of regulation for many crypto exchanges has led to significant risks for investors, including the insolvency of major platforms often resulting in frozen or lost funds. This situation is akin to the shock of finding one's bank account locked, yet it stems from insufficient oversight indirectly permitting risky operational practices that can lead to liquidity crises or shutdowns on the basis of regulatory non-compliance.

Advantages Of Futures Exchanges

Unlike the largely unregulated crypto spot exchanges, futures exchanges offer a secure and stable trading environment underpinned by regulatory bodies like the Commodity Futures Trading Commission (CFTC). These platforms enforce stringent safeguards to protect customer funds, ensuring transparency, centralized trading and minimized counterparty risk. As institutions under the watchful eye of major regulatory bodies, futures exchanges are required to follow strict financial protocols, including maintaining sufficient capital reserves and robust security measures to protect investor assets.

A study by Liangfei Qiu of the University of Florida highlights the benefits of regulation in the cryptocurrency market, demonstrating that stricter regulations lead to more efficient markets. It points out the risks of unregulated cryptocurrencies, such as price manipulation and lack of crucial information, and advocates for investments in platforms that offer vetted information to protect investors and enhance market efficiency.

The EdgeClear Advantage

Trading on regulated futures exchanges such as those used by EdgeClear can grant investors a distinct set of advantages, offering them an edge in precision and risk management when venturing into the cryptocurrency market. By leveraging micro products for Bitcoin and Ether, traders can potentially enjoy a level of exposure that is fine-tuned to their trading strategies and risk profiles. These micro products are sized at 1/10 of their respective tokens, allowing for a more targeted approach to trading that caters to both short-term and long-term investment outlooks across a variety of strategies, from market neutral to directional. Below are some key advantages of trading cryptocurrency futures with EdgeClear:

Enhanced trading precision: Micro products allow for detailed control over exposure levels to bitcoin and ether that enable more tailored trading strategies.

Capitalizing on market downturns: With futures trading, you have the flexibility to either sell or buy into the market, enabling you to seize opportunities presented by downward price movements.

Flexible risk management: The granularity of micro contracts assists in adjusting risk profiles with greater accuracy.

Regulatory safeguards: Trading within a CFTC-regulated marketplace such as the CME Group ensures transparency, centralized trading and reduced counterparty risk.

High-quality market data: Access to the CME CF Cryptocurrency Benchmarks, which provide regulated reference rates and spot price indices ensures high-quality pricing information.

Around-the-clock trading: The convenience of nearly 24-hour trading on the CME Globex platform allows for global market access.

Potential tax benefits: Profitable futures trades are taxed on a 60/40 basis: 60% of gains are taxed at the long-term capital gains rate, and 40% of gains are taxed at the short-term capital gains rate like ordinary income.

Cost efficiency: Competitive pricing with discounted exchange fee pricing through July 31, 2024 makes trading more accessible and relatively lower in cost than spot prices and spreads..

EdgeClear's partnership with platforms like the CME Group Inc. (NASDAQ: CME) and its use of the CME CF Cryptocurrency Benchmarks represent a commitment to offering a trading environment that is flexible, precise and grounded in a framework that prioritizes the security and reliability of market data. These elements combine to create an appealing trading experience that is aligned with the best practices of the industry to help ensure traders can navigate the crypto markets with more confidence.

CME Group is a leading regulated venue for cryptocurrency derivatives. Our market-leading suite of benchmark crypto futures and options provide a way for investors to gain crypto exposure on a regulated market with established financial safeguards for more transparent and efficient risk management, said Giovanni Vicioso, Global Head of Cryptocurrency Products at CME Group

From a trading perspective, I see a distinct advantage to trading MBT over spot Bitcoin, for example, for several reasons: 1) The product is cleared on a central exchange, so the volume data provides for a better technical read on supply and demand, 2) Im able to take advantage of the preferential tax treatment afforded to derivatives in the U.S., 3) There are no hidden transaction fees, such as gas fees; my cost structure is very clear, 4) I can use my favorite trading platform such as EdgeProX and dont need to open another account or learn a new platform to trade it. Trading already carries significant risk, wondering about the safety of my wallet or the solvency of the exchange are additional risks I dont need to worry about as much with futures, said Morad Askar, CEO of EdgeClear and licensed professional trader.

Embracing Regulation For A More Secure Trading Experience

The tumultuous landscape of cryptocurrency trading has probably been the best argument for regulation. Although adherence to regulatory standards is technically about compliance, its a critical measure for protecting investors and ensuring market efficiency. The benefits of trading on regulated futures exchanges, such as platforms like EdgeClear, highlight the value of much-needed security, transparency and reliability in the cryptocurrency market.

However, it is crucial to acknowledge that the price movement and profitability of virtual currency derivative trading are susceptible to the same risk factors that influence the underlying spot markets. For investors seeking to navigate the complexities of cryptocurrency trading, regulated futures exchanges can offer a more secure and efficient pathway to engaging with the digital asset economy.

Featured photo by Art Rachen on Unsplash.

A forward-thinking futures broker. Led by industry experts who understand the complexities of trading, Edge Clear combines the best of technology, service and risk control.

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