Bitcoin takes a big stride away from fringes of finance

Bitcoin takes a big stride away from fringes of finance

CME Group’s announcement on Tuesday (October 31) that it intends to offer futures on Bitcoin this month sent the cryptocurrency surging past $6,400 for the first time; the group’s move has been viewed as bringing Bitcoin a step closer to acceptance within mainstream finance by placing it alongside the CME’s stable of futures on interest rates, stock indices, commodities and currencies. 

Bitcoin’s price has soared from $966 at the start of the year, breaking through the $5,000 mark for the first time on October 11 before settling at $6,362.65 in afternoon trading on October 31, up by 4% for the day. 

Futures are derivatives contracts that investors and companies typically use to speculate on prices or hedge risk against turns in the market. Other major markets like stocks, bonds, commodities and currencies all have derivatives based on them. CME’s futures option would allow investors to hedge bets that the price of bitcoin will rise, something that is difficult at present. 

CME Group, the world’s largest derivatives exchange, explained that the futures will be cash-settled and based on the CME CF Bitcoin Reference Rate, a Bitcoin price index it launched last year. 

The news comes as a surprise because in September CME president Bryan Durkin told Bloomberg: “I really don’t see us going forward with a futures contract in the very near future.” 

However, Terry Duffy, CME Group chairman and chief executive officer, explained that they were simply responding to increased interest in Bitcoin and that the new vehicle “will provide investors with transparency, price discovery and risk transfer capabilities.” 

Garrett See, chief executive of DV Chain told CNBC that CME’s announcement showed “cryptocurrencies are gaining more legitimacy in the financial marketplace. It’s really exciting. I think it’s going to bring a lot of liquidity.” 

The launch of Bitcoin futures contracts is contingent on CME receiving regulatory approval from the US Commodity Futures Trading Commission (CFTC). 

Duffy said on CNBC’s “Closing Bell” that he is “confident” the CME’s self-certification process at the CFTC and full application process will go through. “We’ve been working with the regulator. They understand our application. And they understand our model very, very well.” 

The CFTC declared bitcoin and other virtual currencies a “commodity” in 2015, enabling it to police futures contracts based on them. The agency recently warned that unregistered cash bitcoin markets are susceptible to “bucket shop” schemes, “Ponzi schemers” and “fraudsters seeking to capitalise on the current attention focused on virtual currencies”. 

Bitcoin and the stable of cryptocurrencies has a vocal legion of sceptics and critics who have repeatedly warned of its potential dangers. 

“I have no problem with bitcoin. I like the concept,” Joe Saluzzi, a principal at Themis Trading told CNBC. “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.” 

Saluzzi worries that CME’s stamp of approval will legitimise bitcoin and persuade regulators to approve a growing list of requests for exchange-traded funds (EFT). The ETF industry so far has attracted $3.3 trillion of investor cash and continues to grow. 

“They’re desperate for an ETF on this thing,” Saluzzi said, referring to the major exchanges. “There could be spoofing, there could be layering, there could be all sorts of manipulation going on in bitcoin now, and nobody knows,” Saluzzi said. 

“Until they say they are watching and making sure there are no manipulations and fraudulent activities, until they say we have a better regulatory system, I think we are playing with fire,” he added. 

Other prominent names on Wall Street have been equally vocal on the cryptocurrency. Jamie Dimon, JPMorgan Chase chief executive, has called bitcoin a “fraud” that is used mostly by murderers, drug dealers and other miscreants. Larry Fink, the head of BlackRock, the world’s biggest asset manager, said bitcoin was an “index of money laundering”. 

Assuming regulators grant CME’s application, the exchange will become the second US regulated exchange to offer bitcoin derivatives to institutional traders. LedgerX launched its institutional trading and options platform earlier in October and experienced larger-than-expected volumes. 

Earlier this year, the Securities and Exchange Commission (SEC) stated that it could not review applications for Bitcoin ETFs until derivatives were listed and traded on a regulated exchange. 

In response to Bitcoin’s critics CME’s Duffy said on Bloomberg Television that his exchange’s futures contract should put sceptics at ease. 

“Bitcoin trading at CME will have an instant audit trail to the government regulator,” he said. “That’s what the difference is between our offering and the way it is today.” Traders can’t “circumvent those procedures under our model.” 

Bitcoin has come a long way over a relatively short period of time. In less than a decade, bitcoin has gone from being “mined” in homes and predominantly used to buy illegal goods online into an industry where mining bitcoin, selling digital mining equipment and offering bitcoin trading services and could soon become a tradeable future on the world’s largest derivatives exchange. 

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