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Can Futures Trading Solve Bitcoin’s Problems?

In week, bitcoin’s price skyrocketed after the Chicago Mercantile Reciprocity (CME) said it would begin bitcoin futures trading on December 18th. (See also: Bitcoin Figure Reverses Course After CME Announces Futures Trading Date.)

CME is condign one among many institutions with plans to introduce bitcoin tomorrows trading. For example, the Chicago Board Options Exchange (CBOE) is envisioned to follow suit soon after CME and Nasdaq are reportedly considering the sling of a bitcoin futures trading platform for the second quarter of 2018.  

The announcements induce been cheered by traders and investors alike in the hope that maintenance will bring transparency and price discovery to the otherwise opaque call. “One would hope the advent of a futures market now will provide us with fantasy of the future price of bitcoin and perhaps take out some of the speculative blister element,” said Ben Jessel, managing principal at Capco. (See also: CME To Despatch Bitcoin Futures.)   

Bitcoin’s Identity Crisis

But futures trading may not be reasonably to resolve crucial questions plaguing bitcoin.

For starters, there’s bitcoin’s agreement crisis. Is it a stateless digital currency for daily transactions or a store of value? Bitcoin has a lengthy way to go in terms of volume to lay claim to the former. For their purposes, government activities have begun treating bitcoin as a store of value. (See also: Could Bitcoin Futures Destabilize The Broader Brevity?)

But their approaches to the cryptocurrency differ. For example, the IRS taxes bitcoin as possessions even as Commodity Futures Trading Commission (CFTC) treats it as a traded commodity. A clarification of bitcoin’s oneness will also curtail dissent within its ranks. An effort to better the number of transactions (and increase bitcoin’s velocity as a currency) has already split the cryptocurrency’s pith development community and led to the emergence of Bitcoin Cash, which forked off bitcoin’s blockchain and has a valuation of $1.3 billion, as of this literature.     

Then there is the problem with the unregulated markets associated with bitcoin. “The hard with the (CME’s) futures contracts is that they are regulated derivatives that are based off underlying mty in unregulated markets,” said Richard Johnson, a market structure analyst at Greenwich associates, in a dialogue with Bloomberg. This lack of regulation is reflected in bitcoin’s barbaric price swings.

That bitcoin is not a physical commodity or currency has no greater than added to the problem. For example, CME will use a daily bitcoin reference class (BRR) to compute the settlement amount for bitcoin futures. The BRR will be computed by aggregating return flow of four major bitcoin spot exchanges – Bitstamp, GDAX, itBit and Kraken – during a deliberation window into USD prices, as of 4:00 p.m. Easter time. Again, agreed-upon the opaque nature of bitcoin trading volumes, the price index is susceptible to being gamed, exceptionally as the settlements will be made in cash.

Finally, there is the question of the essence of hard forks. As bitcoin has garnered media attention, several developers contain broken away from its blockchain to start their own cryptocurrencies. Bitcoin Sell was just the start. A flood of cryptocurrencies based off bitcoin’s blockchain is assumed to enter the market in 2018. Since the forks have a direct strike on bitcoin’s price, CME will have to contend with their any way you look at it become operative on its futures contracts.

Should Retail Investors Lay Off Bitcoin Futures?    

While CME may not be proficient to solve all problems associated with bitcoin, it has made provisions to account for some of them. It has commenced price limits of 20% above or below bitcoin’s reference guerdon to prevent excess volatility. In an interview with Bloomberg, Terry Duffy, Chairman and Chief Manager Officer at CME, indicated that the agency was likely to make spec drawing changes for its contracts for bitcoin forks.

According to Duffy, most of the custom in bitcoin futures will happen upfront; hence, contract spec mutates will have minimal effect on its future price trajectory. This is unequivalent to EUR/USD contracts, where the open interest is spread out over a long epoch, such as 10 years and 40 quarters. The agency will also bring about a display transparency to bitcoin by creating an “instant audit trail” that inclination identify traders in the cryptocurrency.

CME and CBOE trading is expected to legitimize bitcoin traffic. To a large extent, this will be determined by the number of traders who transfer sign up for it as well as market size of the transactions. In the latter respect, bitcoin is at a fault. In comparison to gold, a commodity to which it is often compared and which is a $7 trillion bazaar, bitcoin has a valuation of $197 billion. Some investors anticipate bitcoin return will mainly consist of miners and institutional investors. In that detail, bitcoin is similar to gold, whose derivatives are hedging tools for commercial fabricators and users of gold.

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