How futuristic are Bitcoin Futures?
A recent development by CME, the leading global exchange for options and futures trading has made Bitcoin Futures a reality. Which basically means that investors who want to bet against Bitcoin’s massive price gains can likely do so beginning, starting sometime in mid-December, according to the head of the world’s largest futures exchange. While there is still a regulatory approval awaited, the growth of Bitcoin derivatives is a huge step towards the development of the digital currency as a more established asset class. All of this sounds pretty great. Bitcoin futures will allow institutional investors to buy a way into the digital currency market without really investing directly in Bitcoin. And even more than that, Bitcoin derivatives will bring a great deal of liquidity and legitimacy to the crypto-currency ecosystem.
But there is still something really puzzling out there. The latest specifications for Bitcoin futures just came out, and describes these to be cash-settled and not physically settled. Now, isn’t this the one commodity that absolutely should be physically settled? Since there is no real inconvenience in the actually physical commodity to be transferred? What this basically means is that, if you buy a Bitcoin futures contract, and you hold it when it expires, nobody hands you the actual number of Bitcoins underlying the contract. Instead, CME computes a daily ‘Bitcoin Reference Rate,’ which aggregates the trade flow of major Bitcoin spot exchanges. So if the Bitcoin Reference Rate at the expiry of your futures contract is higher than the Bitcoin Reference Rate when you opened the contract, you get paid the difference, and vice versa. In dollars. You get exposure to Bitcoin without ever actually handling Bitcoins.
Now this makes a lot of sense considering how prone most crypto exchanges are to hacks. But thinking about the individuals and institutions who handle the actual Bitcoins, are writing their private keys on scraps of paper and putting those scraps of paper in safe deposit boxes. Something that happened in the 1600’s duh! But the real reason why would people would buy Bitcoin Futures is still really puzzling. So if someone is buying Bitcoin futures, it is probably because they think that Bitcoin will go up. If they think that Bitcoin will go up, it is probably because they think it will be more widely adopted as a currency and a store of value and an alternative to the current financial system. But if they really thought that, wouldn’t they just buy Bitcoins? So are they buying the futures because, deep down, they prefer the existing system? Yeah, well. Think about it.