On Tuesday, it was reported that CME Group Inc. will implement limits on its bitcoin futures to prevent dramatic price swings.
How do these limits work?
There are three trading thresholds: 7 percent, 13 percent, and 20 percent.
Movements of 7 percent (up or down) may prompt a two-minute trading halt. The same trading halt can occur for price movements of 13 percent (again, up or down). These are “soft” limits.
For a 20 percent movement, the CME will utilize a “hard” limit, which caps single-day swings of CME bitcoin futures.
Is there precedent?
Yes, the company also uses limits for stock market futures.
Last week, CME announced that it hopes to offer bitcoin futures in the fourth quarter of 2017, pending regulatory review. In a report the same day, CME wrote, “However volatile they may be, the reason why gold and bitcoin are perceived as stores of value is simple: their money supply doesn’t grow quickly and, in the case of bitcoin not at all, some day.”
In an interesting thought experiment, they added, “While there is no logical reason to suppose that bitcoin should have the same value as gold, if it did, each bitcoin should be worth approximately $285,000, 45 times the current market price.”