Bitcoin Futures Aren't a Big Hit, and That's Good
(Bloomberg View) -- The "normal" financial world on Monday got access to the biggest investing craze of the year, bitcoin -- and didn't immediately bet the farm on it or against it. It's possible that decentralized cryptocurrencies just aren't made for the mainstream, which can be both an advantage and a drawback.
Bitcoin futures traded on regulated exchanges -- starting Monday, the Cboe, soon also the CME and Nasdaq -- have the potential for a big audience expansion for the cryptocurrency. They provide access to institutional investors who cannot deal on bitcoin exchanges because of their unregulated nature and the risks it entails. They also reduce the significant friction involved in trading bitcoin itself, such as long waits for clearing (at the time of this writing, there were some 90,000 unconfirmed transactions -- but in recent days that number has spiked above 200,000, with corresponding rises in transaction costs). The bitcoin community is working on ways to pre-clear transactions before they're recorded in the main ledger, but that's a risky game because of the possibility of hacks. A transaction on a regulated exchange, meanwhile, is guaranteed to clear. It's easy to short the futures contracts, too.
But, judging by the first day of trading on Cboe, there's no wild enthusiasm for the instrument. In the first 12 hours, the total volume reached 2,776 contracts worth one bitcoin each, and the trading largely dried up in the last six hours. At 17,600 -- the level at which the January contract appeared to settle -- that's less than $49 million, an underwhelming number considering that the average daily volume of bitcoin transactions for the last 10 days was $2.7 billion. The futures markets in the most popular commodities, such as oil and agricultural goods, are usually bigger than the physical markets in the underlying assets. Cboe's website has crashed because of the bitcoin futures launch -- but likely because of voyeristic interest rather than actual trades.
Mainstream investment institutions and the industry's leading figures have voiced their mistrust of bitcoin in no uncertain terms. Societe Generale Chairman Lorenzo Bini Smaghi has called the cryptocurrency a "scam." JP Morgan Chief Executive Officer Jamie Dimon described it as a "fraud," Black Rock Chief Executive Officer Larry Fink as a money-laundering tool. Dozens of others -- including Warren Buffett -- settled for the milder "bubble." The thin bitcoin futures trading volume, relative to more established commodities, shows that the industry largely is so far unwilling to make serious bets.
Of course, this is just the first day for the futures, and some degree of conservatism is to be expected. Besides, big banks have been reluctant to clear trades, and brokerages have created friction of their own, setting high collateral requirements -- 50 percent is not uncommon -- for the new instrument, which is essentially a bet on a highly volatile underlying asset. Clearing houses are concerned that, because of bitcoin's wild price fluctuations, they may be forced to cover the bills for clients unable to pay out on their contracts. In an open letter to U.S. Commodity Futures Trading Commission Christopher Giancarlo, Thomas Peterffy, chairman of Interactive Brokers Group, a large broker-dealer, wrote that since "there is no fundamental basis for valuation of Bitcoin and other cryptocurrencies, and they may assume any price from one day to the next," "margining such a product in a reasonable manner is impossible," especially for the shorts. According to Peterffy, even clearing organizations that refuse to have anything to do with cryptocurrency derivatives are exposed to their risk through the exchange if it doesn't clear the bitcoin-related trades separately from all the others.
While some of these concerns will inevitably go away as market participants get used to bitcoin futures, the risk -- and thus the high margin requirements -- won't disappear, so it's unlikely that big institutional investors will commit serious resources to the new market anytime soon. This means that unlike in other commodity markets -- such as oil, for example -- speculators from mainstream financial institutions who trade in bitcoin futures won't have much effect on the actual bitcoin price. On Monday, bitcoin's rate to the U.S. dollar rose -- but not as much as the January futures contract did.
It shows that the kind of conventional investors who have dared to trade the new contract are even more excitable and risk-loving than the crowd that buys and sells bitcoin on unregulated specialized exchanges. These are not the Finks and the Dimons.
Perhaps that's just as well. Mainstream investors shouldn't get FOMO (fear of missing out) like social network addicts. Missing opportunities such as bitcoin's hard-to-explain price explosion is part of their job, which -- at least in theory -- should include the fundamental valuation of assets. It's also part of their job to see how the technology behind cryptocurrencies can be harnessed to more conventional, and perhaps more socially beneficial, uses than rabid speculation. If mainstream investors rushed headlong into the bitcoin futures market, a crash could have more serious repercussions for the technology than if it only affects the bitcoin community and its own infrastructure.
It's likely that the bitcoin futures market will turn out to be a bit like the limited retail market in which the cryptocurrency is used for purchases. It'll serve to raise bitcoin's profile and legitimacy, but it won't be large, and it won't attract much traffic from the biggest players. That's good both for bitcoin and for the sober mainstream investors.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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