Bitcoin Futures Implications for Bitcoin & For The Broader Market

“Cryptocurrencies are here to stay,” says John Deters, chief strategy officer of CBOE Holdings the parent to one of the companies launching bitcoin futures contracts. Bitcoin’s extreme volatility hasn’t been good for bitcoin’s future and legitimacy, hurting bitcoin as a medium of exchange. But CME and CBOE’s bitcoin futures product might change all that.

The world’s leading derivatives marketplace, CME, announced that it will begin trading bitcoin futures by end of year, pushing bitcoin’s price higher. Such trading would be pending regulatory review however the Commodity Futures Trading Commission said it will allow CME and CBOE (the Chicago Board Options Exchange), the largest U.S. options exchange, to trade bitcoin futures.

CME and CBOE therefore appear set to become the first traditional exchanges in North America where cryptocurrency financial contracts will be able to trade.

The launch of futures paves the way for the launch of certain Canadian bitcoin ETFs that have been sitting in limbo — those whose objectives and strategies are predicated on the existence and availability of bitcoin futures contracts. Futures contracts may make American regulators more comfortable with public funds as well as lead to lower volatility and a more optimistic future for legitimization as a currency: high volatility is part of what has held back bitcoin and bitcoin investment funds dependent on regulatory approval (public funds like mutual funds, closed ends or ETFs).

It is also hypothesized that futures would lead to more institutional investment which in turn will lead to lower volatility. Lower volatility could make bitcoin look like an actual currency and legitimize the “cryptocurrency” moniker that is currently something of a misnomer. Currently bitcoin is not considered to meet the economist test for the definition of “currency”, with its volatility being the #1 problem and a roadblock to behaving like a proper medium of exchange.

There’s another more foreboding side to this.

CEO of megabroker Interactive Brokers, Thomas Peterffy, worries bitcoin futures could lead to the next ’08.

His concern, which is fairly unique to bitcoin, is in regards to bitcoin’s volatility and significant drops that it has been known for in its roller coaster market behavioural pattern. He believes the huge price drops could lead to futures contract defaults and trigger a chain of reaction starting with clearing house settlement difficulties that could push bitcoin prices even lower and burn through clearinghouse liquidity.

Peterffy specifically sees this as an issue for smaller clearing houses though. Not everyone agrees with his ominous prediction although he is not the only person referencing the idea of the potential to create a “whale” with these futures contracts (see CoinDesk for an article on this).

The future impact is ultimately unknowable. What many do agree on is that, to some degree, these are unchartered waters — notwithstanding analogies and past experiences in derivatives, these contracts aren’t asset-backed like other asset classes.

Another point of agreement would be that these waters are moving quickly.

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