Bitcoin started yet another chapter in its intriguing life story with the announcement, by exchange owner CME Group, of plans to introduce bitcoin futures before the 2017 year is out. This would allow institutional investors to trade in bitcoin without having to buy the currency itself, which they are legally precluded from doing. The presence of institutional money in the cryptocurrency business points toward substantially more activity and potentially further skyrocketing of the market price of bitcoin and other currencies.
As described in Bloomberg Technology, “A functioning derivatives market could help professional traders and investors access the incredible volatility inherent in bitcoin without having to trade on unfamiliar venues that may risk anti-money laundering and know-your-customer rules. It will also allow traders to hedge their cash positions in the digital currency, which to date has been difficult to do.”
Other parties, like the Gemini Group (owned by the Winklevoss twins), tried and failed to get approval from the SEC for the release of a bitcoin-based exchange-traded fund back in March 2017, but much water has passed under the bridge since then. CME is just one of many exchange and investment houses in the process of establishing a collection of bitcoin based tradable vehicles for the new year. This pulls bitcoin even closer to Wall Street and other mainstream markets.
What Do the Experts Think?
Financial experts’ opinions remain largely cautious, however, especially given the presence of the elephant in the room, being the lack of assets backing up the currency. It can be argued that bitcoin still has nothing to back it, other than the faith and enthusiasm of its investors. Some will stick to the argument that the value of cryptocurrency is derived from the cost and effort required to mine the coins, as well as the willingness of people to buy, sell and trade with them as an instrument of exchange. But when placed under the bright lights of Wall Street, such attributes raise concerns.
Abhishek Pitti, CEO of Nucleus, an Internet of Things specialist, states, “Bitcoin is quite different from traditional commodities like gold, copper, or rice that are currently traded in the futures markets. Thus, there will be a lot of teething issues that CME will face, as it does not have any other commodity that behaves like bitcoin.”
Joe Saluzzi, a principal at Themis Trading, quoted in cryptocoinsnews.com, says that although he has no problem with the concept of bitcoin, “I have a problem that on Wall Street the innovators are trying to package something up and put a derivative label on it when they really don’t know what’s underneath. It reminds me of the financial crisis all over again.”
Mr. Saluzzi highlights the potential for fraud within an unstructured marketplace, “because cryptocurrency trading remains largely unregulated, traders can employ market manipulation strategies with impunity.”
Mr. Pitti of Nucleus also points out that in addition to fraud, there are also “unregulated cryptocurrency exchanges around the globe, which could potentially steer away a lot of traditional and conservative investors.”
The Legitimization of Bitcoin
Others, however, see the emergence of the bitcoin ETF as the next great leap forward in the legitimization of cryptocurrency.
Bharath Rao, CEO of Leverj, an Ethereum-based decentralized leveraged crypto exchange, points out that bitcoin is the “bellwether of the entire crypto market, and a regulated, developed exchange product gives confidence to trade large size for many institutions.” He suggests this will lead to a range of additional crypto products. “We are likely to see a flurry of activity in this sphere. CME’s introduction of bitcoin futures may herald the first step in mainstream acceptance of crypto as a real asset class.”
Is Bitcoin Too Big to Manipulate?
As many people are aware, bitcoin was created to be centerless and ownerless. In this way, it is similar to a startup – a young, aggressive company with a promising idea or a superior product, firing on the rocket power of its founding team of entrepreneurs. Microsoft was like this once. So was Google. So was Uber. But then, in most cases, the company goes public and gets old and cautious. Decisions are no longer made by the impassioned entrepreneur; they are now made by a board of directors, under pressure from shareholders and fund managers.
Some people feel this may be bitcoin’s future. Once released onto the streets of the financial quarter, it will be swiftly leashed and muzzled, its once-deflationary 21-million-unit limit now weakened by unlimited amounts of paper representing futures deals, as well as the relentless pressure of investment houses to behave within pre-defined limits. It might, for the first time, actually have a boss that it has to work for.
The move towards futures trading – not only through CME Group, but also through other exchanges – is likely a genie that can never be put back in the bottle. Wall Street has had a good whiff of the excitement and it wants what it wants. The market, being unregulated and incredibly borderless, may pose great challenges to investors and fund managers alike, but it has become too big to ignore any longer.