Stacks of bitcoins sit near green lights on a data cable terminal in this arranged photograph in London, U.K. (Photographer: Chris Ratcliffe/Bloomberg)

Anybody Want Bitcoin Futures? Anybody?

(Bloomberg Businessweek) -- On a Sunday evening last December, as the cryptocurrency craze consumed the world, traders waited eagerly at their computers to witness the debut of a flashy new financial product.

Bitcoin futures were set to start trading on Cboe Global Markets Inc.’s exchange at 5 p.m. Chicago time. Futures allow an investor to place bets on the price something will hit at a later date without having to buy the asset itself. Industry enthusiasts hoped the contracts would help bring Bitcoin trading into the financial mainstream, ushering in big investors with bulging pocketbooks.

In the months leading up to the debut, Bitcoin’s price went ballistic. It surged around 600 percent between when Cboe revealed its plans in early August and CME Group Inc. started trading its own version in mid-December, which coincided with Bitcoin’s record high of about $20,000. It has since lost more than half its value.

It’s not surprising that the cryptocurrency peaked within hours of the kickoff of CME’s contracts, according to Michael Unetich, vice president of cryptocurrencies at Chicago-based Trading Technologies International Inc. Some people were expecting tens of thousands of contracts per day to trade, he says, “and the market just wasn’t ready for that to happen.”

Ten months later, some of the hopes for Bitcoin futures look more like pipe dreams. Cboe and CME combined traded about 9,000 contracts a day in the third quarter. “It has not been what you would call a roaring success,” says Craig Pirrong, a finance professor at the University of Houston and an expert on futures trading. “Institutional players have stayed on the Bitcoin sidelines, and as long as they are, the futures contracts are likely not to generate substantial amounts of volume.”

The average of about 5,000 daily contracts at CME in the third quarter is up from around 3,500 in the prior quarter. Still, by comparison, CME traded more than 18 million contracts daily in the second quarter on products tied to everything from oil and gold to interest rates and the S&P 500. “We’re not seeing huge flows” for Bitcoin contracts, CME Chief Executive Officer Terry Duffy told Bloomberg Television in July.

The folks at Cboe have said much the same thing. “There’s been more articles than volume,” Chris Concannon, Cboe chief operating officer, told Bloomberg in August. “It’s a little bit shocking to me the attention this market gets versus its size,” he added. “The entire crypto market is a fifth of Apple.” Apple Inc.’s market value is more than $1 trillion, compared with a total of about $210 billion for all the cryptocurrencies tracked by Coinmarketcap.com.

What’s more, the contracts are extremely expensive compared with those for many other kinds of futures. To place a trade, customers must post margin—industry parlance for collateral set aside in case a trade goes bad—that exceeds 40 percent of the value of the trade. That means stashing more than $4,000 in a clearinghouse for a $10,000 trade. That compares with about 4 percent for CME’s S&P 500 futures.

Large institutions tend to make up the bulk of volume in futures markets, and they’ve been absent from Bitcoin futures, Pirrong says. With commodities such as corn and wheat, big farmers and agricultural producers, in addition to speculators, use futures contracts to hedge their risk so they can focus on running their businesses. For Bitcoin, there’s “a lack of any need for any hedging—there’s really no major commercial or institutional use for Bitcoin futures,” Pirrong says. “The natural clientele for a futures contract doesn’t really want or need Bitcoin futures. That might change someday. A lot of the institutional firms are putting their toe in the water.”

But if Cboe and CME Bitcoin futures have fallen short of expectations, that doesn’t mean they’ve been a failure. Most products the exchanges launch have little volume at first, Unetich says. “Many of them are killed off with very little fanfare,” he says. But Bitcoin futures are “probably considered statistically one of the more successful products, both out of the gate and with the growth in the first six months.”

VIX futures, which Cboe introduced in 2004 and which allow traders to bet on the volatility of the stock market, took a long time to claim success, says Brad Koeppen, head of crypto trading at CMT Digital. Average daily volume didn’t crack 10,000 until 2010, according to data compiled by Bloomberg based on Cboe’s regulatory filings. “But that is now a very successful product for the Cboe, and there are a lot of ETFs based off of it, and there’s a whole asset class around it,” he says. “These Bitcoin futures will get to the same place. People just forget how long it took for the VIX.”

Futures based on Ether, the second-largest digital coin, may be next. CME said in May it would review client demand for the product. The exchange operator began publishing a price index for Ether, something it also did for Bitcoin, a harbinger of those futures contracts. Cboe has said Ether is the next cryptocurrency it wants to target. Still, it’s not clear how much demand there would be given the drop in prices and the performance of Bitcoin contracts.

Exchanges aren’t done experimenting with Bitcoin. Intercontinental Exchange Inc., a Cboe and CME rival, plans to introduce futures through a new company called Bakkt, a platform for using and trading crypto which has support from Starbucks Corp. Still, Pirrong, of the University of Houston, doesn’t see a big expansion of the crypto futures market anytime soon. “It has to become a more mainstream asset class, as opposed to the rather fringe part of the financial markets that it is today,” he says. “If I knew whether that was going to happen, I’d probably be on a yacht drinking mai tais.”

©2018 Bloomberg L.P.