December 11, 2017

Breakingviews: Bitcoin Futures Set Scene For More Gambling

by Breakingviews.

Bitcoin action is now available without the bitcoin. CBOE Global Markets launched its futures on the crypto-currency late on Sunday. It opens fresh avenues for trading, but for now the new contracts have little utility beyond speculation.

The one-month future surged more than 20 percent from the open before trading below $18,000 on Monday morning – still a premium to the crypto-currency itself. Considering the price of bitcoin has risen two-thirds this month alone, that seems fairly sedate. Volume was roughly $50 million, Breakingviews calculates, less than 0.5 percent of actual bitcoin trading in the prior 24 hours, according to

Futures have real-world value, for example allowing producers or consumers of a commodity to insure themselves against price movements, or helping investors to hedge their positions. In the bitcoin world, there are so-called miners with investments in processing power and hefty costs like electricity who could use the contracts this way, but that’s about it. And with bitcoin soaring more than 15-fold in 2017 to well over $16,000 early on Monday, selling bitcoin futures short is likely to be prohibitively expensive.

Most market players will be cautious until the contracts settle down. There are, though, other reasons for concern. Bitcoin futures aren’t perfect proxies for the real thing, partly because they will be settled in dollars not the crypto-currency, which trades at different dollar prices in different places. CBOE settlements, for example, will be based on bitcoin’s value on the Gemini Exchange, established by Cameron and Tyler Winklevoss of Facebook fame.

CME’s futures, launching next weekend, will settle at a reference price drawn from multiple exchanges. One opportunity could be arbitrage, exploiggting the pricing discrepancies. But it will take time for any patterns to emerge.

Proponents reckon the entry of two big, regulated U.S. exchanges bolsters the legitimacy of bitcoin. It certainly broadens the universe of possible investors, and it invites the creation of new exchange-traded funds, which need a liquid benchmark to track. That would bring bitcoin exposure to retail investors.

Yet the Futures Industry Association, which represents clearing houses and big banks, is apprehensive about the light regulatory scrutiny so far. And making the contracts cash-settled means the exchanges – and their customers – can now ride the bitcoin bandwagon without touching the crypto-currency at all.


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