BITCOIN EVOLUTION
Big changes coming with great anticipation of trading futures, ETFs for cryptocurrency
Cryptocurrency fever was already rampant when Evolve Funds Group Inc. on Sept. 22 announced it was the first company to file a prospectus to offer a Canadian bitcoin exchange-traded fund. Since then, investor frenzy has reached a fever pitch.
Over the past two and a half months, bitcoin has more than quadrupled in price. Investors have poured US$1 billion into initial coin offerings, where startups offer cryptocurrencies in exchange for capital. Even digital cats — yes, digital cats — are being bought and sold for six-figure sums on the blockchain of Ethereum, a rival cryptocurrency platform.
Institutional investors will soon be able to join the fun by trading bitcoin futures for the first time, first through Cboe Global Markets Inc. on Sunday and then through rival CME Group Inc. on Dec. 18.
As a result, the amount of capital at risk if the cryptocurrency bubble bursts is probably going to grow exponentially. And the traditional financial system, which some predicted would be obliterated by bitcoin, will become even further integrated into what was once considered a fringe curiosity.
Despite the potential dangers and an eye-popping trading price, bitcoin is going mainstream.
Evolve chief executive Raj Lala said the demand for a Canadian bitcoin ETF is incredibly strong. He said having a regulated futures market on reputable mainstream exchanges is an important first step before offering the fund, because it eliminates the need for actual bitcoin to change hands.
“Futures have become a great proxy way to participate in a commodity,” Lala said. “This just makes for an easier way for you to participate in the price performance of bitcoin.”
But participating in the price performance of bitcoin is certainly not for the faint of heart.
On Friday, bitcoin surged to a new high of more than US$17,000 overnight, plunged to just under US$14,000 by noon and finally recovered to about US$16,000 by the end of the day. Just one year earlier, a single bitcoin was worth just US$770.
Currently, many institutional investors are unable to buy cryptocurrencies for a variety of regulatory and practical reasons. But futures contracts and ETFs will make it possible for them to place bets on the price of bitcoin going up or down using familiar exchanges and financial tools.
Big-name investors might be anxiously awaiting the opportunity to trade bitcoin futures, but the banks, which have to guarantee those trades, are not so eager.
Walt Lukken, chief executive of the Futures Industry Association, which represents financial institutions that hold customer funds and clear trades, expressed his concern in an open letter on Thursday to the U.S. Commodity Futures Trading Commission.
“A more thorough and consid- ered process would have allowed for a robust public discussion among clearing member firms, exchanges and clearing houses to ascertain the correct margin levels, trading limits, stress testing and related guarantee fund protec- tions and other procedures needed in the event of excessive price movements,” Lukken said. “The recent volatility in these markets has underscored the importance of setting these levels and processes appropriately and conservatively.”
The bitcoin futures markets that are about to launch are all cashsettled, which means a trader who buys an option to purchase bitcoin at a certain price in the future and holds the contract to expiration will receive or pay the gain or loss in regular central-bank-issued dollars.
In other words, the futures market won’t directly affect demand for bitcoin for the most part, although some investors might spot arbitrage opportunities or hedge their positions by actually buying the cryptocurrency.
However, bitcoin futures and ETFs will increase the digital asset’s visibility and bring it to the masses.
The financial instruments will also further cement bitcoin’s current principal use as a store of value, rather than a censorship-resistant payment network that’s independent of government control.
Anthony Di Iorio, a founder of Ethereum and chief executive and co-founder of Jaxx, a multi-cryptocurrency wallet, and Decentral, a Toronto innovation hub, said bitcoin’s evolution from a proposed payment network to an asset worth holding is not necessarily such a bad thing.
He said the big institutional money moving into bitcoin is likely to further increase the fee that miners charge per transaction — making it even less financially viable to use bitcoin as a means of buying a cup of coffee — but there are hundreds of other cryptocurrencies that may be better suited for that purpose.
“Perhaps bitcoin is not going to be what people thought,” Di Iorio said. “It might not be bitcoin for the day-to-day stuff, for the smaller things. But other ones are emerging, other ones will still find gaps.”
At a conference in Riga, Latvia, in late November, bitcoin security expert and entrepreneur Andreas Antonopoulos said the entry of futures doesn’t necessarily mean the cryptocurrency is about to lose its radical roots and become a speculative playground for Wall Street types.
In a video of his remarks posted to YouTube, Antonopoulos said the futures market will perform a useful function for the bitcoin ecosystem, allowing the miners who secure transactions to hedge against price swings by taking short positions.
“I think it’s important to recognize the CME is not Wall Street,” said Antonopoulos, who works on the oversight board of the exchange’s bitcoin reference rate. “I don’t think these people are as alien to our culture as many believe.”