The age of Bitcoin investments going mainstream is nearly upon us, at least for traders in the US market. Last Wednesday, the highest-volume derivatives market in the world, CME Group, announced that it open its upcoming Bitcoin Futures market on December 18th. The second largest market, the Chicago Board of Exchange (CBOE), then one-upped the CME and announced that they’ll be the first to launch Bitcoin futures trading on December 10th.
With these two markets offering exposure to bitcoin a whole new sector of institutional traders, with some of the world’s highest volume of trading, will be able to place bets on the direction of bitcoin’s price.
– CBoE President Chris Concannon
Wall Street’s Nasdaq market also announced that it would list a bitcoin futures market recently, launching in the second quarter of 2018. A fourth and smaller exchange, Hollywood’s Cantor market, is additionally planning their own Bitcoin-based derivatives product before that time.
In Japan, the Chief Executive Officer of Tokyo Financial Exchange, Shozo Ohta, told reporters last week that the exchange does not yet have a green light to trade bitcoin futures. However, the exchange plans to create a working group to study cryptocurrency futures trading. The group will also “study various aspects” of the Bitcoin ecosystem, according to the CEO, “including bitcoin’s present status, its outlook, and what form it will take root in Japan’s society.”
Ohta told reporters at a press conference on Friday that the roadblock stopping them from trading bitcoin futures is pending legislation. “Once the Financial Instruments and Exchange Act recognizes cryptocurrencies as financial products, we will list the futures as quickly as possible.”
In South Korea, Bitcoin Futures have been banned. According to Business Korea, the Financial Services Commission (FSC) issued a directive on Wednesday that bans all South Korean securities firms from hosting bitcoin futures transactions. “It is the first time for the South Korean authorities to ban trading a specific item,” the publication quoted a local official as saying. The country’s officials don’t “recognize bitcoin as an underlying asset of derivative products,” Business Korea continued, “so bitcoin cannot be a subject for futures trading.”
Meanwhile, Russia’s Central Bank has reportedly banned the country’s largest securities exchange, Moscow Exchange (MOEX) from trading bitcoin futures as well, at least until a bill is passed allowing them to do so. According to Russian news publication Tass, “the Bank of Russia is ready to return to consider this issue only after the corresponding legislation appears in Russia.”
While a futures contract gives the buyer an obligation to purchase an asset at a set price in the future, the bitcoin futures products on these new exchanges will all be settled in US dollars, and will not deliver actual bitcoins at the end of each contract.
This disconnect from the underlying asset makes it impossible for futures contracts to directly influence the price of bitcoin on any exchange. Even still, there are three benefits to a bitcoin futures product that experts generally agree on.
The first and most obvious benefit is that the futures position can be used as a hedge for bitcoin traders and miners. The underlying purpose of any futures market is to reduce the price volatility of an underlying asset.
For example, wheat growers can grow a crop and then sell it for whatever the market price is when it’s harvested, or they could lock in a price by selling a futures contract that locks in a fixed price. By locking in the price now, farmers eliminate the risk of falling wheat prices. On the other hand, if the market price increases they may lose out on some extra profit. However, they can operate their business without the risk of a volatile income.
At the very least, bitcoin futures will allow bitcoin miners to make their income much more predictable. If electricity prices go up, or for some other reason their mining becomes unprofitable, a hedging position on a bitcoin futures market can mitigate this risk.
A second reason that a bitcoin futures product may be advantageous is that being included in the largest markets in the world extends new legitimacy and credibility to bitcoin from the existing financial system. It makes bitcoin an official type of asset, at least by the standards of the top US markets. Brand name recognition of this new asset will be extended into every sector through all of the existing financial trading channels.
A more discreet reason that a futures product will be good for bitcoin, however, is that it allows ETFs and other mainstream financial products to invest in bitcoin. In September, the U.S. Securities and Exchange Commission (SEC) made it clear in an official response to leading gold fund management firm VanEck that they would not allow the funds’ Bitcoin ETF to be approved as it does not recognize bitcoins as a financial instrument that can be used in the fund.
Several other Bitcoin ETFs that had applied for consideration were pulled by their submitters shortly afterward. However, now that the SEC has specifically named bitcoin futures as an investment that it would consider for such funds, ETF submission will likely start again early next year.
Photo via Getty Images