Bitcoin, together with the invention of futures contracts in the crypto-currency, is taking steps towards becoming a legitimate investment, moves which might also let it infect broader financial market equilibrium for the very first time.

Even though the monetary world just doesn’t have sufficient exposure to the industry to cause concern at this time, increasing involvement of hedge funds and their banks through the new futures generates a link and threat which could see it bursting like a gigantic bubble onto other markets.

Let us be clear, we are not discussing systemic threat here. We found that with Lehman Brothers in 2008 when the economic and financial world as we know it came within hours of a wipe-out.

If big banks or leveraged speculators such as hedge funds take on large positions in bitcoin shares and find themselves on the incorrect side of a surprising and striking cost swing then the market-to-market contagion may spread.

Within this scenario, they’d have been forced to liquidate holdings of other assets such as bonds or stocks to pay their standing at bitcoin, or fulfill the hefty margin requirements given with the market-making brokers.

Doug Kass, president of Seabreeze Partners Management, believes among next year’s large market surprises might be bitcoin soaring over $US20,000 ($A26,147) before diving under $US2,000 ($A2,615), an accident which could take down hedge funds with it.

The collapse of a hedge fund, exchange or broker often does not have any effect on markets in any way. But occasionally it will. The most famous was hedge fund LTCM in 1998, and in 2011 the passing of agent MF Global triggered a 10 percent correction on Wall Street within a four-week period. To say there has been no lack of volatility at bitcoin is an understatement. It’s jumped to over $17,000 from under $1,000 in January and intraday prices of $1,000 or more are now a regular occurrence.

There are great reasons to think bitcoin’s intense volatility will strike just those vulnerable to this cryptocurrency, and those ripples across financial markets will probably hardly be felt. For all of the hype, press policy and crazy price moves recently, bitcoin remains just a rather modest portion of the financial world. Its whole market capitalisation is about $US280 billion, approximately the same as Walmart. If Walmart shares wreck, say 50 percent, will world economies crumble with this?

Volatility would surely spike greater, but it is unclear how prevalent or lasting the contagion would be. In other words industry cap into circumstance, Wall Street’s overall equity market cap is over $US20 trillion.

Even if hedge funds do buy into bitcoin, how deep can they go? Hedge fund assets under management are nudging $US4 trillion and the bitcoin world is $US280 billion.

If bitcoin dropped up to 90 percent now it’d still be greater than it had been at the beginning of the year. So individuals who’ve been holding it for some time, ie. many bitcoin investors, could still be sitting on newspaper earnings. Nevertheless the combination of extreme price volatility, the introduction of futures and also the chance for speculators to take risky bets with borrowed funds makes a fresh and riskier dynamic.

In the money market, most bitcoin trading continues to be from retailers and unleveraged. That means reductions are confined to the people and minimal places in question. The scope for broader contagion is minimum. But that will not always be true when larger players and much more competitive speculators become involved with borrowed funds in the desperate pursuit of greater yields.

Andy Brenner, Head of International Fixed Income in National Alliance Securities in New York, claims that the increase of trading volume and open interest in bitcoin futures bears monitoring.

Although 2017 was a lousy year for hedge funds many will be tempted to borrow and also gamble greatly next year.