Bitcoin, this year’s hottest investing fad, has plenty of risks. Hackers could steal your bitcoins. The price could crash, after surging 1,600% this year.

With this week’s launch of bitcoin futures, there is a new danger to worry about: the threat of manipulation involving futures markets.

Chicago-based Cboe Global Markets Inc. launched the first bitcoin futures on Sunday, and its larger, crosstown rival CME Group Inc. is set to follow suit this weekend. Both exchange operators say they designed their futures contracts to reduce the risk of manipulation, and they plan to conduct surveillance to ensure it isn’t happening.

So why are some people worried that bitcoin futures could be manipulated?

There is a long history of alleged manipulations in futures markets, going back to the wheat squeezes of the late 19th and early 20th centuries. In those, one or more firms would hide or remove grain from the market, driving up the price of futures contracts.


In a fundamental way, bitcoin futures manipulation would resemble those old-time squeezes: Unscrupulous traders would engage in chicanery in the underlying “physical” market for bitcoin in order to reap profits from the futures.

I’m confused. What do you mean by “physical” bitcoin?

Bitcoin is purely digital, so it isn’t physical in the same sense as oil or gold. But like those commodities, it is traded globally in many different marketplaces. The constant back-and-forth between buyers and sellers on bitcoin exchanges like Bitfinex or GDAX determines how many dollars one bitcoin costs. This is what traders call the “spot” price of bitcoin.

Meanwhile, bitcoin futures—as the name suggests—allow you to bet on what bitcoin’s price will be in the future. For instance, the most popular bitcoin contract on Cboe right now expires Jan. 17. So if you think the price of bitcoin will rise by mid-January, you can buy the contract, or go “long.” If you expect bitcoin to fall, you can sell the contract, or go “short.”

The virtual currency bitcoin continues surging to new highs as a frenzy of investors get in on the action. WSJ's Paul Vigna explains what you need to know, and how to invest should you want to join the mania. Photo: Alexander Hotz/The Wall Street Journal.

So how would bitcoin futures manipulation work?


The scenario most often discussed involves pushing around the price of bitcoin when the futures contract expires. This is a classic scheme often called “banging the close.”

Let’s say you bought 100 Cboe bitcoin contracts expiring in January. The final value of these contracts is set by a daily auction held at 4 p.m. ET on Gemini, a bitcoin spot exchange. The idea behind Gemini’s auction is to bring together many buyers and sellers to determine a benchmark bitcoin price for that day.

But suppose you heavily bought bitcoins in the Jan. 17 Gemini auction, offering to pay an abnormally high price. That could skew the benchmark higher, inflating the value of your 100 bitcoin futures contracts.

Such a scheme would be tough to execute if there were large numbers of participants in the auction, because it would take a big purchase to boost the benchmark. Also, other traders could see that you were paying above-market prices in the auction and try to profit by selling to you—which would lower the benchmark to more reasonable levels.


But Gemini’s volumes are thin: From January to November, an average of $1.3 million in bitcoin changed hands in the auction each day, a sliver of the billions of dollars’ worth of bitcoin traded daily. That has raised fears that a relatively small amount of trading could move the auction price.

Cboe and Gemini say they expect auction volumes to grow.

Gemini, unlike some overseas bitcoin exchanges, also requires customers to submit proof of identity before they can trade on the platform. That means it and Cboe could identify any manipulators and refer them to the authorities.

Another deterrent: Cboe limits the size of futures trades you can have near expiration, which reins in the potential profit from banging the close.


“We have robust measures in place to preserve the fair and orderly trading of our bitcoin futures contracts,” a Cboe spokeswoman said. Gemini referred questions to Cboe.

How about CME’s bitcoin futures? Could they be manipulated?

Perhaps. But it would take significant effort to avoid the exchange’s countermeasures. CME’s futures rely on a daily index calculated by averaging transaction prices at four bitcoin spot exchanges between 3 p.m. and 4 p.m. London time. Anomalous trades are tossed out so they can’t influence the calculation.

So to bang the close at CME, you would need to do intense buying or selling at several of those bitcoin exchanges during the 60-minute window as the futures are expiring. That would be Jan. 26 for the first contract CME plans to list.

CME says it is better to rely on four exchanges than one. “We are not beholden to any one price source,” said Tim McCourt, global head of equity products at CME. “We have multiple constituent exchanges, which all work together to enhance the integrity of the index.”

So how likely is it that bitcoin futures will manipulated?

It’s hard to say. The big unknown is that the bitcoin spot market is opaque, with vast swaths outside regulatory oversight.

Consider this scenario: Cryptocurrency veterans say a small number of so-called whales hold many of the bitcoins in circulation, because they invested early, when bitcoin was cheap. Such an investor could short bitcoin futures, then dump their stash of bitcoins just before the futures expire, causing a world-wide price crash and profiting from their short trade, while also cashing in their years-old bitcoin investment. If they did the selling on overseas bitcoin exchanges instead of at Gemini or any of CME’s partner exchanges, it would be tough for U.S. officials to catch them.

On the other hand, the likely blowback from regulators, exchanges and cryptocurrency enthusiasts could discourage a whale from attempting something so brazen.

“There’s going to be intense scrutiny of these contracts,” said Tom Lehrkinder, an analyst at Tabb Group. “But people can always do crazy things.”