CME, CBOE Bitcoin Futures Trading-A Threat To Bitcoin

The Threats of Bitcoin Future

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CME Group, the largest derivatives exchange in the world, as well as one of the oldest, will launch bitcoin futures trading on Dec. 18th, while CBOE Global Markets, which owns the Chicago Board Options Exchange (the largest U.S. options exchange) and BATS Global Markets, plans to beat CME to the punch by opening its own trading on Dec. 10th.

In theory, this opens the doors to institutional and retail investors who want exposure to bitcoin but for some reason (internal rules, or an aversion to risky and complex exchanges and wallets) can’t trade actual bitcoin.

A primer

First, a brief overview on how futures work: Let’s say that I think that the price of XYZ which is currently trading at $50, will go up to $100 in two months.

Someone offers me the chance to commit to paying $80 for XYZ in two months’ time. I accept, which means that I’ve just “bought” a futures contract. If I’m right, I’ll be paying $80 for something that’s worth $100. If I’m wrong, and the price is lower, then I’ll be paying more than it’s worth in the market, and I will not be happy.

Alternatively, if I think that XYZ is going to go down in price, I can “sell” a futures contract: I commit to delivering an XYZ in two months’ time for a set price, say $80. When the contract is up, I buy an XYZ at the market price, and deliver it to the contract holder in return for the promised amount.

If I’m right and the market price is lower than $80, I’ve made a profit.

Side effects

That’s important. Why? Because institutional investors will like that. Size and liquidity make fund managers feel less stressed than usual.

The bitcoin market seems to be excited at all the institutional money that will come pouring into bitcoin as a result of futures trading.

But here’s the thing: the money will not be pouring into the bitcoin market. It will be buying synthetic derivatives that don’t directly impact bitcoin at all.

For every $100 million (or whatever) that super mega hedgefundX puts into bitcoin futures, no extra money goes into bitcoin itself. These futures do not require ownership of actual bitcoins, not even on contract maturity.

So, while the market appears to be greeting the launch of not one but two bitcoin futures trading exchanges in the next two weeks (with two more potentially important ones on the near horizon) with ebullience, we really should be regarding this development as the end of the beginning and the beginning of a new path.

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