Scrambling for the “Future”: How the CME/CBOE announcements may affect the bitcoin market
Futures exchanges sprint to market — launch Dec. 10th
Bring legitimacy, validation to asset class — too soon?
An instrument to short, first and foremost
Future cash markets are disconnected from the underlying BTC — antics ensue
Gap risk, volatility, fragile markets — all the reasons SEC was cautious on the ETF — still in play
Will this market be efficient? Futures are by definition leveraged — Margin Call!
Buy on the rumor, sell on the news? BTC $16K as we print
Over the past few weeks, we’ve witnessed what can be described as a scramble for bitcoin futures. Both the CME and the CBOE announced their plans to launch bitcoin futures by the end of the year, with the CBOE eventually moving up their launch date to December 10th. The appearance of exchange listed bitcoin futures is an exciting development for the digital asset market. These products represent the first institutional instrument to truly bridge the gap between traditional capital markets and the world of cryptocurrency. The resulting effects post launch will be noticeable, however not all will be favorable. How will the launch of bitcoin futures affect market sentiment, price dynamics and the overall adoption of bitcoin? Element Group comments on the big news.
The CME and the CBOE are well-respected financial entities in the US. For them to add bitcoin futures as a listed product adds significant legitimacy to bitcoin as an asset class and this will allow a much broader group of investors and speculators to take part in the digital asset space. Until recently, most traditional market participants have largely shied away from bitcoin, citing the asset’s volatility as a key consideration. The bitcoin futures will allow expose the digital asset class to mainstream portfolios for the first time, as funds will be able to participate in the cryptocurrency market without actually purchasing cryptocurrency itself. Interestingly enough, both exchanges were quick to obtain regulatory clearance. Regulators have been fairly benign in this situation, with the CFTC being particularly permissive in letting the CME and CBOE self-certify and move forward so quickly. Perhaps this will serve as precedent for similar products in other cryptocurrencies, as well as ETFs, which could be a real game-changer for the industry.
We are reminded first and foremost that futures are an instrument to short. Be it for hedging or to express a directional view, the futures market has traditionally had the liquidity to short an asset class with minimal friction. The ability to express this view on bitcoin could in the long term smooth out excessive volatility. Although some volatility is essential for a healthy market, in bitcoin’s case more stability could make it even more attractive for important financial players, such as institutional fund managers. And a functioning futures market will likely translate into more traded volume around bitcoin itself, an additional check mark in the eyes of an institution.
However it is important to consider that the same factors that make bitcoin futures attractive can also pose some risks. The trading of bitcoin futures will be entirely separate to that of bitcoin. The futures market will be operate on conventional market hours during weekdays. Bitcoin trades 24/7. This obvious gap risk means that in theory, bad actors could move the price of bitcoin when the futures market is closed and force margin calls or liquidation for participants when it opens. Also, futures are a cash-settled instrument. Whether the futures price and the price of bitcoin move in tandem will be wholly dependent on the mechanism to arbitrage. If futures are trading rich, can a market participant efficiently sell them and buy bitcoin to earn a profit? If futures are trading cheap, can a market participant efficiently buy them and sell bitcoin to earn a profit? Best case scenario, the answer is yes and efficient markets will beget more volumes and liquidity. Worst case scenario, the answer is no and slippage in trading begets sustained dislocations from fair value.
Overall, we see this move on the part of CME and CBOE as a mostly positive development for the industry. However, the positives may take some time to come into fruition. Trading futures will allow traditional investors to express a directional view on digital currency, without having to deal with the relatively new and immature infrastructure related to custody and funds management in the space. Time will tell how fast adoption spreads, but the excitement within the market is already palpable. Bitcoin’s current upward momentum may be linked to positive sentiments in anticipation of the futures launch. As we approach the launch date, we may notice some downward movement on the price, as this may be a case of “buy on the rumour, sell on the news”.
It’s a brave new world.