By Josiah Wilmoth
With the impending launch of bitcoin futures contracts on regulated U.S. exchanges, bitcoin has officially earned its Wall Street moment and is on the verge of gravitating into the mainstream.
Bitcoin Futures to Launch in Mid-December
This year has been a watershed for bitcoin and other cryptocurrencies. The industry has seen unprecedented growth, both in terms of market value and the underlying infrastructure of the blockchain ecosystem.
This sustained uptrend has caused many skeptics to label bitcoin a “speculative bubble,” comparing it to Tulipmania in 17th-century Holland or the Beanie Baby craze in the late 1990s. Some have been more pointed in their attacks, such as JPMorgan CEO Jamie Dimon, who derided it as an outright “fraud.”
However, this week brought multiple announcements that demonstrated the folly of these assessments. Friday morning, the Chicago-based CME — the world’s largest derivatives exchange — announced that it had self-certified to list bitcoin future contracts on December 18, pending final approval from the U.S. Commodity Futures Trading Commission (CFTC).
That same day, fellow Chicago exchange CBOE announced that it had filed a product certification with the CFTC to list bitcoin futures. The CBOE futures to not yet have a target launch date, but the exchange says it will announce this soon.
Those announcements followed a Wall Street Journal report that stated that Nasdaq Inc. plans to introduce bitcoin contracts on its futures exchange by the second quarter of next year. The report also revealed that Cantor, a lesser-known exchange located in New York, will become the second regulated exchange — LedgerX was the first — to offer bitcoin swaps.
Commenting on the CME and CBOE announcements, Digital Currency Group founder and CEO Barry Silbert predicted that the launch of bitcoin futures would soon lead to SEC approval of exchange-traded funds (ETFs) that track the price of bitcoin and other cryptocurrencies.
“I think it is going to enable finally the approval of bitcoin ETFs, and other digital currency ETFs, which is game changing,” Silbert said on CNBC’s “Squawk Box.”
‘Not Going to Let It Go to Zero’
The bitcoin price traded up on the news, piercing the $11,000 mark just two days after intense volatility briefly caused it to dip below $9,000.
Clearly, traders believe that the launch of bitcoin futures will cause Wall Street capital to flow into the crypto-asset ecosystem. However, what no one really knows is what effect these futures will have on the market in the short-term. Will skeptical institutions short bitcoin, and if so, what effect will these cash-settled contracts have on bitcoin itself?
Given bitcoin’s present volatility, some institutional heavyweights — most notably Thomas Peterffy, chairman of Interactive Brokers — have expressed concern that the futures contracts could cause unwanted ripple effects across the wider markets.
However, the CFTC issued a statement that said it had secured agreements from the exchanges to provide “significant enhancements” to protect customers and “maintain orderly markets.”
“Bitcoin, a virtual currency, is a commodity unlike any the Commission has dealt with in the past,” said CFTC Chairman J. Christopher Giancarlo in the statement. “As a result, we have had extensive discussions with the exchanges regarding the proposed contracts, and CME, CFE and Cantor have agreed to significant enhancements to protect customers and maintain orderly markets.”
In the past, CME Group CEO Terry Duffy has stated that the exchange has a number of trading rules that prevent the market from getting out of hand. “I’m not going to let it go to zero,” he has stated.
In Friday’s announcement, he reiterated that the exchange has a number of tools in place to mitigate risk, even with assets as volatile as bitcoin.
“At launch, our new Bitcoin futures contract will be subject to a variety of risk management tools, including an initial margin of 35 percent, position and intraday price limits, and a number of other risk and credit controls that CME Group offers on all of its products,” Duffy said.
Bitcoin’s Wall Street Moment
It is not clear whether CME’s futures will immediately attract significant volume or if investors will be tepid to interact with this nascent product. Even if they are thinly-traded, however, their mere presence on a regulated exchange lends significant legitimacy to their status as a financial instrument.
“The prospective launch of bitcoin futures contracts by established exchanges in particular has the potential to add legitimacy and thus increase the appeal of the cryptocurrency market to both retail and institutional investors,” Nikolaos Panigirtzoglou, a global markets strategist at JPMorgan, said in a Friday report.
Elsewhere in that report, Panigirtzoglou stated that cryptocurrency was increasingly establishing itself as an emerging asset class that has the potential to continue to grow from its present record level.
CBOE President Chris Concannon made similar statements in a round of interviews discussing CBOE’s decision to become one of the first exchanges to list bitcoin futures.
“The launch of the futures will actually make the market healthier,” Concannon said in an interview “It will create pricing equilibrium in the market. Clients who are holding bitcoin now have no way to hedge their risk. These products allow them to hedge, and to take opposing views. More importantly, it brings a wave of regulatory oversight.”
That regulatory oversight could prove crucial in helping bitcoin further penetrate into the mainstream as a financial instrument. For years, one of the biggest threats to mainstream bitcoin adoption in the U.S. has been that the government would issue a blanket ban against cryptocurrency. While the government could not shut down the bitcoin network, it could make it illegal for businesses to accept cryptocurrency or engage with the asset in any manner. This looming threat was one reason institutional investors were so hesitant to dip their toes into the crypto-asset ecosystem. However, now that bitcoin earned its place Wall Street it appears highly improbable that cryptocurrency will fall prey to such a disastrous black swan event.
Indeed, bitcoin’s Wall Street moment has arrived, and it’s likely only a matter of time before bitcoin makes its way to Main Street through investment products marketed to retail investors.
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By Josiah Wilmoth