JSE’S BITCOIN SECRET

Are killjoy hedge funds about to take the pin to the bitcoin bubble? If so, they’re picking a fight with the currency’s evangelists

Nearly a decade ago, two young men pitched up at the reception of the JSE Securities Exchange in Maude Street, Sandton, and asked to see Warren Geers, the head of currency futures.

Geers, at that stage, was stitching together the exchange’s currency derivatives arm. The two men pitched an idea: how about the JSE launches futures contracts over a fledgling virtual currency called bitcoin? There’ll be big growth in this bitcoin, they argued.

Geers wouldn’t bite. You couldn’t blame him: vetoing an imaginary currency backed by nothing isn’t exactly like Dick Rowe rejecting the Beatles because, apparently, “guitar groups are on the way out”.

“It seemed way too scary, a fly-by-night thing,” says Geers now. “For one thing, I couldn’t see how we could value those instruments as there was no independent price source.”

Back then, bitcoin was an infant. In 2010, $1,000 would have bought you 12,500 coins; today, with bitcoin surfing highs of $11,800 apiece, those coins would be worth $137m. (In rand terms, a R13,500 investment in 2010 would have become R1.86bn — with a “b”.)

Geers, who left the JSE in July to be MD of trading firm F-wise Capital, where he heads currency and equity derivative trading, isn’t the first to marvel at the mind-curdling lost opportunity.

“I could kick myself. We could have made a lot of money. In hindsight, it’s created a lot of multibillionaires. But at the time, we had no idea,” he says.

Today, it wouldn’t be too difficult to set up a bitcoin futures contract. You could use one of the numerous bitcoin “exchanges”, such as Luno, to establish a price, and contracts could be marked-to-market every day.

But before 2010, cryptocurrencies were the stuff of sci-fi fringe economics, evangelised on Internet chat groups by the same whack-job libertarians who’d discuss how much you could score by selling a mint edition Action Comics #1 (vintage: 1938). Back then, most exchanges — let alone the notoriously conservative JSE — would have cold-shouldered bitcoin.

Next week, however, bitcoin futures will begin trading on the Chicago-based Cboe Futures Exchange. The week after, bitcoin futures will begin trading on the Chicago Mercantile Exchange.

It’s both a spur to mainstream adoption of bitcoin, as well as perhaps the biggest risk yet to the cryptocurrency. For the first time, bitcoin will face an army of disbelieving hedge-fund managers, armed with a new set of pins and an itch to pop that bubble.

Until now, they wouldn’t have been able to borrow bitcoin to short the hell out of it; the futures contracts present that opportunity. The upside, however, as Craig Pirrong, a business professor at the University of Houston told Bloomberg, is that “having this instrument that makes it easier to short might keep the bitcoin price a little closer to reality”.

This won’t deter bitcoin’s squadron of evangelists. John Mcafee, the man who founded the anti-virus software that bears his name, reckons bitcoin will hit $1m/coin by 2020 — which seems unhinged.

But for every evangelist there’s a truckload of cynics, who’ll bet on the bubble popping. Sometimes the contrasting views are even within the same company.

Two weeks ago, it emerged that Old Mutual’s Gold & Silver Fund (which manages $220m in precious metals) had begun buying bitcoin since April. The fund’s manager, Ned Naylor-leyland, is a big believer.

Yet this week, Old Mutual’s investment strategists Dave Mohr and Izak Odendaal said bitcoin was “firmly in bubble territory” — a fair call, given that the price has soared 70% in November alone. This is the stuff of “speculative mania”, said Mohr and Odendaal, of the sort evident during the South Sea bubble of the 1700s.

“Its fundamental value cannot have increased that much in the space of 11 months,” they said. “Daily bitcoin transactions have risen 30% this year, but the price has increased tenfold. Investors should not ask themselves whether the news is good (or bad), but whether the good news is priced in.”

But don’t expect rationality to act as a handbrake when the futures contracts begin trading.

Geers may have missed out on a bitcoin futures desk at the JSE, but he didn’t miss the boat. “I’ve bought a few bitcoins, I bought into the hype,” he says.

Hype it most certainly is. Laurie Dippenaar, who — with GT Ferreira and Paul Harris — built SA’S largest bank, Firstrand, told the Financial Mail this week that “the price is rising because people are buying it”.

In other words, it has “value” only because others say it has. Just wait till the hedge funds pile in.

Years ago, the JSE had the chance to launch a bitcoin futures trading desk. It sensibly declined