Full-page ad in WSJ warns about dangers of bitcoin short selling
The chairman of Interactive Brokers LLC, Thomas Petterffy, has issued a warning about the market destabilisation potential of bitcoin in a full-page ad in the Wall Street Journal, in particular, pointing to the difficulty of "determining the margin requirement" for short sellers. Petterffy wrote: "Unless the risk of clearing cryptocurrency is isolated and segregated from other products, a catastrophe in the cryptocurrency market that destabilizes a clearing organization will destabilize the real economy." Peterffy advocates isolating bitcoin clearing or trading in an exchange that clears only cryptocurrency transactions to mitigate possible systemic risk.
Thomas Peterffy, one of the world’s most successful derivatives traders, reiterated concerns Wednesday that bitcoin could lead to a financial crisis.

In an ad in the Wall Street Journal’s Nov. 15 issue, the Hungarian-born entrepreneur, who is the chairman of Interactive Brokers LLC, outlined his worries about an impending plan to launch a futures exchange tied to bitcoin in the coming weeks. The advertisement was an enlarged version of Peterffy’s open letter to Commodity Futures Trading Commission Chairman J. Christopher Giancarlo dated Nov. 14, and took up a full page in the WSJ’s print edition.

“Margining such a product in a reasonable manner is impossible,” Peterffy’s letter reads, referring to the use of leverage to augment returns in an investment. “While the buyer (the long side) of a cryptocurrency futures contract or a call option could be required to put up 100% of the value to ensure safety, determining the margin requirement for the seller (the short seller) is impossible,” he wrote.

Peterffy fears that exchanges will offer low margins to entice buyers to do business on their platforms, but the wild trading swings that bitcoin BTCUSD, -1.27% is known for could imperil both the trading platform and the investor who is shorting, or betting that they can profit from borrowing an asset whose value is expected to decrease in value.

So-called short sellers hope to return assets borrowed on margin, or on loan, at a lower value and then pocket the difference between where it was borrowed and its new price. However, the prospective losses in such a scenario, if an asset suddenly skyrockets, can be limitless and brutal.

And that is the deepest worry for the trader.

The CME Group CME, -3.44% kicked off a product to reference bitcoin prices a year ago, and announced a plan to launch futures contracts pegged to bitcoin as early as the second week of December, according to CME CEO Terry Duffy in an interview on CNBC on Monday.

Duffy said CME may institute trading halts at 20% swings in the value of bitcoin to smooth out some of its volatility. Peterffy, however, argues that that might not be sufficient to protect against severe moves within, which aren’t infrequent occurrences in bitcoin trade.

In an interview with Barron’s, Peterffy expressed similar misgivings. “The weaker clearing members charge the least. They don’t have much money to lose anyway. For this reason, most bitcoin interest will accumulate on the books of weaker clearing members who will all fail in a large move,” Peterffy said.

Peterffy advocates for isolating bitcoin clearing or trading in an exchange that only clears cryptocurrency transactions to mitigate possible systemic risk.

“Unless the risk of clearing cryptocurrency is isolated and segregated from other products, a catastrophe in the cryptocurrency market that destabilizes a clearing organization will destabilize the real economy, a critical equity index and commodity markets cleared in the same clearing organization become infected,” Peterffy wrote in the open letter Wednesday.

Bitcoin was up 9% late Wednesday in New York at around $7,220, while bitcoin rival ether tokens, trading on the Ethereum blockchain, were down about 2% at $331. Both assets have seen stratospheric moves in 2017. Bitcoin is up about 650% year to date, while ether tokens are up more than 4,000% so far this year.