Bitcoin takes a big stride away from fringes of finance

Bitcoin takes a big stride away from fringes of finance

Bitcoin’s value surged past $7000 on November 2 setting a new high on the back of news that CME Group will offer a futures option later this, the move may be a pre-curser to Bitcoin becoming an exchange-traded fund and acceptance by mainstream finance

CME Group’s October 31 announcement to offer futures on Bitcoin this month sent the cryptocurrency surging past $6,400. The move brings Bitcoin closer to mainstream finance, placing it alongside CME’s futures on interest rates, indices, commodities and currencies. 

Bitcoin’s price has soared. It started the year at $966, broke $5,000 on October 11 before settling at $6,362.65 on October 31. 

Futures are derivatives contracts that investors 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 that Bitcoin’s price will rise, something that is difficult at present.

Bitcoin price index based futures contract

The move is significant because CME Group is the world’s largest derivatives exchange. CME explained that the futures will be cash-settled and based on their CF Bitcoin Reference Rate. 

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, DV Chain CEO 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.”

Regulatory approval

The Bitcoin futures contracts is contingent on CME receiving 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 cryptocurrencies 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 cryptocurrencies has a vocal legion of sceptics and critics who have repeatedly warned of its potential dangers. 

Joe Saluzzi, a principal at Themis Trading told CNBC says he likes Bitcoin and the concept behind it. But, warned: “I have a problem that on Wall Street the innovators are trying to package something up (Bitcoin) 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.” 

Growing investor cash

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 criminal elements. 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. 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. 

Putting sceptics at ease

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.  It started out as being “mined” and used to buy illegal goods online. Within a decade it’s evolved into an asset that could soon become a tradeable future at CME.

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