A
trader signals an offer in the Eurodollar pit at the CME Group
prior to the Federal Reserve’s announcement that interest rates
would remain unchanged November 2, 2011 in Chicago,
Illinois.
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CME Group, a leading marketplace for derivatives
which handles 3 billion contracts worth about $1
quadrillion annually, is set to roll out bitcoin futures by the
fourth quarter. -
A bitcoin future will allow investors to bet on the
future price of bitcoin without having to actually hold the
coin itself. -
It could bring more Wall Street firms into bitcoin and
other cryptocurrencies.
Just when you thought you finally got your head around bitcoin,
along comes a new bitcoin-linked financial product: bitcoin
futures.
CME, the Chicago-based exchange giant,
said on Tuesday that it would launch a bitcoin futures product
before the end of the year. Last year CME launched a
bitcoin index CME
CF Bitcoin Reference Rate. The bitcoin futures will be based
off of this rate.
Cross-town rival exchange
Cboe
has long had a plan for bitcoin futures in the works
,
and is also preparing for a possible Q4 launch.
Bitcoin
popped after the news and has continued to rise since. It’s
gained more than $300 since Tuesday and is trading near $6,600
per coin.
Since the beginning of the year, the price of bitcoin is up over
500%. That epic rise has gripped the attention of Wall Street and
Main Street alike. The development of bitcoin futures is the
latest chapter in a broader story about cryptocurrencies gaining
traction among traditional players in financial services.
Here’s a quick explainer of bitcoin futures and why they could be
a big deal for Wall Street and bitcoin.
What are futures?
Futures, which allow two parties to exchange an
asset at a specified price at an agreed upon date in the
future, have been around since the late 19th
century.
They are traditionally traded by
professional investors and firms.
CME, trades futures based on everything from oil to
corn. In some cases, when a futures contract settles the buyer of
the contract can receive their payment in the product itself (a
barrel of oil, say), or in cash.
The latter are referred to as cash settled futures.
For instance, an investor can buy a future
for a commodity like oil betting that its price goes up at a
certain point in time. Let’s say oil is trading at $50 right
now, and the investor thinks the price is going to go higher.
They might buy a future to buy oil at $55 a month later. If the
price of oil is $60 when the contract expires, they get the $5
difference.
What would a bitcoin future look like?
Both Cboe and CME have said that their bitcoin futures
products would settle in cash. And that’s exactly what makes the
possible market so appealing to Wall Street. Firms who buy
or sell bitcoin futures don’t have to worry about actually
holding the cryptocurrency itself.
In a way, bitcoin futures would be similar to other futures
traded on Wall Street, according to Bank of America Merril
Lynch.
“The reason this may be relatively straightforward is that
there is no conceptual
difference between
running a futures market on bitcoin (or technically some cross
rate
involving bitcoin) and oil,” the bank said
in a wide-ranging note about cryptocurrencies.
John Deters, chief strategy officer of Cboe, highlighted
this feature of the product in a recent interview with Business
Insider.
“People will be able to settle in cash,” Deters said. “So you can
take a speculative position without touching bitcoin itself,
which helps make it more attractive to all sorts of folks.”
You can take a speculative position without touching bitcoin
itself, which helps make it more attractive to all sorts of
folks.
Why do people care?
There are a number of reasons why bitcoin futures products would
be a big deal for Wall Street and the world of crypto. First, the
launch of bitcoin futures by establishment firms is likely to to
open the door to wider participation in bitcoin trading by other
Wall Street firms.
“The CME announcement provides the first step in
legitimizing the ever-growing crypto space as a true financial
asset,” Dave Johnson, the CEO of Latium, a cryptocurrency technology
company, told Business Insider. “For market makers this presents
access from a known and trusted party into a $94 billion
marketplace.”
Business Insider previously reported two high-frequency traders,
Virtu Financial and DRW,
are looking to provide liquidity in bitcoin futures markets.
And other firms are likely to jump on the bandwagon as well.
Goldman Sachs, for instance, is thinking about
setting up a bitcoin trading operation.
Futures could also help dampen volatility in the underlying
bitcoin market, which is known for its wild price swings. Here’s
Bank of America:
We would not overstate this, as a material reduction in
volatility would require there to be a large community of
speculators prepared to provide liquidity to the natural owners
of the various coins, but given the volatility of the coin
markets, maybe there already exists a cadre of participants who
would look to short coins on strong days and vice versa, which
could overall reduce volatility.
Get the latest Bitcoin price here.>>