No matter what some such as Jamie Dimon at JP Morgan may think of Bitcoin, it is indeed here to stay. The CME has just announced that they will be introducing Bitcoin futures in the next few weeks which will allow traders to hedge their risk to market events.
This also comes a just over a month ago, a top official at the exchange said that he did not see an option of listing Bitcoin futures at any time. However, the chief executive of the organization cited the demand from the institutions as a reason for them to list it.
Now that they have a fully regulated derivative exchange, it could be a major move that will enable all of these institutions to invest take part in hedging their portfolios. It also adds a great deal of legitimacy to the investments.
Jumping on the Trends
There are other derivative exchanges that are operating already such as LedgerX which allowed for the trading of swaps and options. There was also news from the CBOE Global Markets Inc that they would also be offering futures contracts by the end of the year.
Now that there is this supply of Bitcoin option brokers it will be easier for market participants to short the coins. It will also increase liquidity with some of these HFT firms that can benefit from market making in the middle.
Moreover, having access to a regulated exchange such as that offered by CME will allow all of the large investors and traders to buy the coins without using avenues that are often more murky and could fall afoul of anti-money laundering regulations.
Are Banks Next
This could come in stark contrast to many of the Wall Street banks who have been quite skeptical of digital currencies. For example, Llyod Blankfein from Goldman Sachs has claimed that they are open to ways in which they can get in on the market.
Of course, many people are aware of the stance that has been taken by Jamie Dimon. He famously said that he would be firing any trader who ever bought them. Yet, about a month later his CFO appeared to contradict him by claiming that the bank was “very open minded to the potential use cases in the future for digital currencies that are properly controlled and regulated.”
There are also concerns that the CME will try to price the Bitcoin contracts as though they are another type of contract such as corn or wheat. The price of Bitcoin is way more volatile and the main locations for buying the coins is in offshore exchanges that are not regulated by the US.
This could be a concern for these types of exchanges can go bust. This is indeed what happened with Mt Gox back in 2013 when the exchange was hacked and had to halt all of the withdrawals. These should be taken into account if the CME really wants to protect themselves.
Another concern that was mentioned by Jon West who is a digital asset trader at Omega one was that the margin required could be unattractive. Margin is usually tied to the volatility of the asset. In the case of Bitcoin we already know it is quite extensive. If the margin required is prohibitive then it is unlikely that many investors will be happy with entering positions.
Positive for an ETF
The creation of these futures both by CME and LedgerX is also a positive development for the eventual roll out of a Bitcoin ETF. This is still the Holy Grail among many Bitcoin investors as it will immediately allow many large institutional investors a retail product linked to the digital currency.
Indeed, when the SEC rejected an application by the Gemini exchange earlier this year for a Bitcoin ETF, they used the argument that a significant portion of the market remains unregulated. This would add weight against that argument.
This is mainly based on how large the CME is. They have derivative products on a range of different assets including commodities, indexes and volatility products. They also have operations all around the world.
One of the concerns that has been raised is the manner in which the futures contracts are settled. Given that these are cash settled contracts, there could be a lack of liquidity. This is indeed a point that was raised by Garrett See who is the CEO of DV Chain.
These cash settled futures will use the auctions on the Gemini derivatives exchange. Yet, there is not a lot of volume in these auctions. The more important question is what will happen if one of these auctions fails?
Hence, although See was really excited about the introduction of derivatives into the market, he says that he would of preferred to see physical delivery on the contracts.
Mass Market Tipping Point
No matter the concerns that are raised about the futures, one cannot discount the importance of this announcement. It was not even a few months ago that you still had people dismissing Bitcoin as a “bubble” or “fad”.
Bitcoin has gone through cycles before and has been declared dead hundreds of times before. Whenever there was a small dip in the price so called professionals lined up to bash it. Today, Bitcoin stands strong in the face of past critics.