Bitcoin debuts on futures market

Bitcoin - futures market - CBOE

Bitcoin has made a further step into the mainstream by trading on a major futures market exchange for the first time.

The digital currency launched on the Chicago Board Options Exchange (CBOE) futures exchange in Chicago at 23:00 GMT Sunday 10 December. The launch is highly significant as it makes the first time that institutional investors can bet on whether Bitcoin’s value will continue its rocket upwards, or come spiralling back down to earth.

The launch has seen a spike of interest and a large surge in trading volume. At the time of writing, Bitcoin’s value has surged by 25% and CBOE has temporarily halted trading twice.

Futures are contracts that essentially allow investors to bet on whether the price of an asset will rise or fall. Investors are now able to put their money on the performance of Bitcoin without actually having to own any.

Another key aspect of the launch is that it will make it easier for investors to but Bitcoin, as there is not longer the strict requirement to set up a digital wallet.

Bitcoin - futures market - BBC - Bloomberg

Potential volatility

The move to start trading Bitcoin futures was made possible following approval by the US Commodities and Futures Trading Commission (CFTC).

The move has not been met with universal acclaim, however, with many in the industry warning of the high potential for volatility.

In an open letter released in the wake of the CFTC decision, CEO of the Futures Industry Association, Walt Lukken wrote:

“The recent volatility in these markets has underscored the importance of setting these levels and processes appropriately and conservatively. We remain apprehensive with the lack of transparency and regulation of the underlying reference products on which these futures contracts are based and whether exchanges have the proper oversight to ensure the reference products are not susceptible to manipulation, fraud, and operational risk.”

The acting governor of the Reserve Bank of New Zealand, Grant Spencer, is quoted in The Guardian as saying:

“It looks remarkably like a bubble forming to me. Over the centuries we’ve seen bubbles, and this appears to be a bit of a classic case. With a bubble, you never know how far it’s going to go before it comes down.”

USB analyst has also voiced a note of caution:

“Should investors bet against the bubble? That is high risk. UBS believes cryptocurrencies are a bubble. However, being able to short a bubble does not make the bubble burst at once. Cash settled futures contracts on tulip bulbs began in Holland in 1636.

“The tulip bubble did not burst until February 1637. Bubbles are by definition irrational. Predicting when a bubble will burst cannot use rational analysis. Ignoring a bubble is the best course of action.”


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