
Bitcoin Futures Could Open the Floodgates for Institutional Investors - chollida1
https://www.bloomberg.com/news/articles/2017-10-31/bitcoin-futures-could-open-to-floodgates-of-institutional-money
======
eric_h
I just cashed out the last of my bitcoin. All in all turned a small (4 digit)
profit with which I will buy myself a couple of toys.

I'm sure I left cash on the table, but I was too late to the game to have
really made a fortune on this stuff (curse my younger self for giving up on
setting up a miner after a little difficulty ("it'll never be worth anything
anyway", I said to myself), back when a cpu could still mine).

Good luck to everyone still playing - I'll believe bitcoin is going somewhere
when the majority of it's transaction volume isn't speculation, drug dealing
or money laundering.

~~~
ttul
This. Like it or not, we are in for a crash followed by a long crawl back for
cryptocoin investors. The tech is cool and useful, but not $6400/BTC useful
just yet.

~~~
dpandya
If you're as confident on this as the comment suggests, you could purchase the
appropriate futures with most of your net worth and make lots of money.

If you don't want to do that, maybe it isn't quite as certain as you suggest.

~~~
roenxi
We had an article on the Kelly criterion just the other day that handily
refutes your point.

Even if bitcoin is certain to crash, without a deep understanding of when (and
by extension, how) a naive futures trader still runs a good chance of being
eaten alive, or making poor returns.

Stating bitcoin will crash is a bit like the conventional wisdom that smoking
is bad for your health. One can reasonably be very confident in the truth of
it without being confident in specific odds on any bad outcome.

~~~
rjbwork
"The market remain irrational longer than you can remain solvent."

~~~
the_rosentotter
Or maybe you were just wrong and not everybody else? Just a thought. (I know
this is a quote from Keynes)

------
chollida1
Again the biggest issue is how to verify the integrity of the underlying
instrument, in this case bitcoin.

What the SEC was after when they denied the winklevoss ETF was a way to
confirming that they could audit all bitcoin transactions on the applicable
exchanges, and following from that, the identities of all the exchange
participants.

Here is the reference index that the CME is using

[http://www.cmegroup.com/trading/cf-bitcoin-reference-
rate.ht...](http://www.cmegroup.com/trading/cf-bitcoin-reference-rate.html)

and here is the methodology that they are using to calculate the bitcoin
price. As far as I can see, they are accepting trade confirms from the
following venues....

Bitfinex, Bitstamp, GDAX, itBit, Kraken and OKCoin.com

[http://www.cmegroup.com/trading/files/bitcoin-reference-
rate...](http://www.cmegroup.com/trading/files/bitcoin-reference-rate-
methodology.pdf)

Interesting that these are cash settled vs being settled in bitcoin. I guess
that speaks as to who they expect to use these instruments.

~~~
andrewla
> What the SEC was after when they denied the winklevoss ETF was a way to
> confirming that they could audit all bitcoin transactions on the applicable
> exchanges, and following from that, the identities of all the exchange
> participants.

I don't think that's accurate, unless you're using a strange sense of the word
"audit". The SEC's criticism seemed mainly to focus on the fact that the
exchanges lacked controls to prevent price manipulation, and lacked oversight
by regulators (not just the SEC) to ensure those controls were in place and
effective.

The constituent exchanges are listed here [1], basically the list you posted
without Bitfinex or OKCoin.com.

> Interesting that these are cash settled vs being settled in bitcoin. I guess
> that speaks as to who they expect to use these instruments.

This seems an odd decision to me as well, especially since Bitcoin is almost a
textbook commodity. I guess they are afraid that there could be a short
squeeze if the existing exchange can't handle a greatly increased volume, but
trusting that the exchanges can provide sufficient liquidity is a requirement
to use their pricing data as well, otherwise you can get manipulation on the
other end.

[1] [http://www.cmegroup.com/education/brr-brti-constituent-
excha...](http://www.cmegroup.com/education/brr-brti-constituent-exchanges-
criteria.html)

~~~
ttul
Drug dealers will use the futures. Drug dealers.

------
cwkoss
Bitcoin Futures have been tried before, with little effect on institutional
investors.

Key point is that CME Group (Chicago Mercantile Exchange) will be offering
them. Being able to transact Bitcoin derivates _on a trusted derivatives
exchange_ will be attractive to more conservative institutional investors.

~~~
lrm242
This is how any reasonable institution not 100% focused on cryptocurrencies
will gain cryptocurrency exposure. The big reason is they are backed by CME
clearing and settlement. It helps to significantly reduce the counter-party
risk associated with other venues.

~~~
jstanley
Note that storing bitcoin properly comes with no counterparty risk whatsoever.
That's like 50% of the entire point of bitcoin!

~~~
politician
Well, the fact that the majority of the mining pool runs out of China
certainly represents a counterparty risk. I'm not sure why folks regularly
ignore the 51% issue.

~~~
Phlarp
While there is certainly some amount of quantifiable risk given how
centralized mining is in China, each individual mining actor is still
incentivised not to participate in a 51% double spend attack as the value of
bitcoin would rapidly fall towards zero if a double spend attack ever did
occur, making their ASIC investments unprofitable in a hurry.

~~~
jacobush
I don't know. It's like nukes. They say, no one would use them, because that
would let the cat out of the box. But... on the other hand, what would happen
if someone used only a single nuke? Could we get to the circumstance that
Bitcoin was "too large to fail" and a someone could get away with a double
spend?

------
rebuilder
The article states the BTCUSD rate spiked over 5% after the announcement they
mention. That kind of spike is fairly common for Bitcoin, and attributing it
to news seems pretty arbitrary.

------
libertymcateer
Bitcoin futures are regulated by the CTFC.

[http://www.morrisoncohen.com/siteFiles/files/For%20Blockchai...](http://www.morrisoncohen.com/siteFiles/files/For%20Blockchain%20a%20Coming%20Wave%20of%20Change%20-%20NLJ%20-%2010-01-17.pdf)

It will be quite interesting to see how institutional investors and the CTFC
come down on this whole phenomenon. I do not share the unbridled optimism of
many of my peers.

------
dharma1
I dunno if this is good. Maybe for miners who want to hedge. But seeing how
much bitcoin price reacts to news and how relatively easy it is to spread fake
news, I think this just creates more incentives for market manipulation.

It's pretty hard to manipulate commodity futures prices with fake news but
crypto currency market trends are pure psychology

~~~
ThrustVectoring
That's kind of the advantage of making it easier for the professionals to
participate - they have a tendency to react better to news and more accurately
price things (since they make giant piles of money if they accurately price
things that others mis-price). I suspect that bitcoin futures would damp the
volatility in the bitcoin market.

~~~
dharma1
In theory yes, but how do you price bitcoin accurately even as a professional
investor? You can't. There's no edge, aside from market manipulation with fake
news, and maybe front running with insider news that might affect the price.

~~~
ThrustVectoring
>how do you price bitcoin accurately even as a professional investor?

You can arbitrage the price of mining equipment + electricity vs the cash
value of shorting a bitcoin future. Mining rewards are approximately known
along with the halving date, mining rigs have a known cost, electricity costs
are predictable, etc. Every time BTC futures rise enough above your cost of
mining on a risk-adjusted basis, sell more short and expand your mining
operation.

That's the fundamental pricing dynamic. At least on the short side. The long
side makes zero goddamn sense to me, but at least people can place a maximum
value based on the forecasted cost of mining and put serious downward pressure
on prices that way.

------
dogruck
Note that the Futures will settle in cash.

------
osullivj
A futures contract on a real exchange like the Merc is a big step forward for
exchange members like tier one banks, and smaller trading shops that have
access to futures via brokerage relationships. The article also mentions ETFs,
which will give retail investors BTC exposure.

~~~
tomatocracy
ETFs are the reason this is a big thing. The CME contract enables ETFs with
viable size and for both long and short BTC (otherwise they would only really
be possible as long ETFs, although the ETF could be shorted itself, and long
ETFs would have to own the underlying BTC). In turn, that gives retail
speculators (it feels difficult to call them investors for BTC...) access to
BTC, which is a significant pool of money.

------
geetfun
Wow this is going to open up the casino to a lot of major players. I fear the
hobbyist investor is going to get roasted. Anything that can be traded on such
a scale will undoubtedly be manipulated.

~~~
wmf
One could just as easily make the opposite argument; e.g. Bitfinex apparently
allows wash trading while "legacy" exchanges like CME probably don't.

------
Animats
Bitcoin's market cap is probably wildly exaggerated. The best evidence of this
is the Winkelvii's attempt to start an ETF. That's a way for them to unload
their Bitcoins, of which they have over 100,000.

There's no market that could absorb over 100,000 Bitcoins and pay out dollars
without crashing the price. Who's going to pay out $0.6 billion in cash?

~~~
brndnmtthws
The 24h trading volume of Bitcoin is currently at around $2.8b, so I don't
think you're necessarily right. There's been $2.8b of Bitcoin sold in the last
24h, and the price has gone up. You could probably sell that many coins over
the course of a couple weeks without having much effect on the market.

------
uberrr
Could these be shorted? It’s only a matter of time until one or more of the
unregulated exchanges cuts and runs or gets shut down and seized.

~~~
Sangermaine
Or "gets hacked" and all of the coins are "stolen".

~~~
tmaic
These will be derivatives, not actual bitcoins. When you enter a contract you
will only care about the price level of the Bitcoin Reference Rate, the
contracts aren't holding any actual bitcoins, so there is nothing to hack and
steal.

~~~
mediocrejoker
I'm not sure if that's accurate though. If a large quantity of coins
disappeared, surely that would have ripple effects through to even the most
convoluted derivatives?

------
ThrustVectoring
It's a good idea, IMO. There's a natural market here on both sides, between
miners who have an economic interest in being short BTC futures, and
institutional investors who want long exposure through a standardized
exchanges and products that they are already allowed to use. And as a side
bonus, this should significantly reduce volatility in the market.

------
fspeech
Institutionals use futures to hedge their other positions. What will they use
bitcoin futures to hedge for? An unhedged future position is not an
investment. It is a gamble.

~~~
sgspace
Bitcoin is a hedge against fiat and the fractional reserve banking system.

~~~
matt4077
It doesn't make sense for institutional investors to hedge against "fiat".
Because the failure of the current financial system would be catastrophic
event for any such investor, at which point his hedging wouldn't help. I. e.
the exchange where these futures are traded would no longer be operational.

There's a name for this effect which I've forgotten. But it can be seen, for
example, in the markets ignoring the risk of nuclear war during the Cuban
Missile Crisis. The reason is the same: there's no use in considering nuclear
war in your decision-making, because you'd be dead anyway.

~~~
Fomite
This. If "fiat" collapses that's a catastrophe far beyond the level of "No
worries, I have some bitcoin futures in an exchange."

It's like saying bitcoin is a hedge against the end of the world.

------
joejerryronnie
I'm curious if anyone here thinks the bay area housing market is a bubble but
bitcoin is a solid investment.

~~~
sheeshkebab
It sounds like you do? Sell your expensive sf house and take your fdic insured
money losing saving account and plow it into bitcoin - invest for the future!
It’s all solid.

------
onewhonknocks
This is a very interesting turn of events.

------
Top19
This paper from the Journal of Economic Letters two years ago determined that
“the fundamental value of Bitcoin is 0”:
[http://scholar.google.com/citations?user=DhMqG0YAAAAJ&hl=en](http://scholar.google.com/citations?user=DhMqG0YAAAAJ&hl=en)

If you want to see the choice quote you’ll need to go to www.sci-hub.io.

~~~
Double_a_92
The fundamental value is the distrubuted and anonymous ledger.

------
paulpauper
the nice thing about bitcoin futures is no conatango, no risk of key
loss/theft.

~~~
defgeneric
Shouldn't the risk of key loss/theft mean the BTC futures will normally be in
contango?

------
preparat
Wonder how they would deal with forks, if it's an issue at all.

~~~
ThrustVectoring
It's cash settled based off the price of an index, which makes it easier. They
just defer to the folks making the index.

If it was physically settled you could squeeze the shorts by having a last-
minute unilateral grant of a side-token to everyone who possesses the
underlying. The shorts have to come up with the token or cover the contract -
either way, you have people who are forced to buy it to cover contractual
obligations, and you probably own the only exchange capable of making
transactions with NewToken (and maybe also you pre-mined some of bonus tokens
to sell?)

When its cash settled, this is much less of an issue. No market? No market
price, so it doesn't get included in constructing the index.

------
partiallypro
This will end in tears

~~~
statoshi
... of the skeptics when they realize the opportunity they missed.

------
pasbesoin
From bubble to froth.

------
nikolay
Thanks, but no thanks! I'd keep as far away from this stinking pile as
possible! It's 2017! We have instant bank transfers and everybody can get a
free Square reader and accept payments. PayPal is not what used to be and you
can accept global payments with no friction. It's time to end this nonsense,
stop talking about Bitcoin, focus on the blockchain, and let it show its true
colors when there are no disoriented people confusing blockchain with Bitcoin
who keep buying fueled by their pathological greed. If I want to speculate,
there's a more sophisticated method, but, wait, it requires a brain - the
stock market! With Robinhood and the likes - it's scam-free and I don't rely
on the Chinese miners or government for my fortune's security!

~~~
wolco
The stock market over bitcoin? Bitcoin is up double the last 30 days. Timing
is everything your opionion is dated or belongs in the future in the present
bitcoin is a good investment

~~~
nikolay
If you sell now, it _was_ a good investment. If you _hold_ , nobody knows
(well, I do.)

~~~
mirimir
Hey, I earned most of my current Bitcoin at $200-$300. Some I'm selling, of
course. But the rest, I'm OK with betting.

~~~
nikolay
That's your decision. Nobody in Bitcoin can guarantee you that the value will
stay above $200 though.

~~~
mirimir
Yes, no doubt.

But on the other hand, since the parent comment was posted, Bitcoin price has
increased 10%. And I'm pretty sure that I could sell before it drops 90%.

~~~
nikolay
Yeah, so, what's the economic reason for the spike? More people use Bitcoin
today? Let's cut the bullshit, please! Mere mortals do not have Bitcoin and
are not interested in it - at all. All the noise is around blockchain
technology and Ethereum, i.e., it's bearish toward Bitcoin. Russia and China
are waging wars against it, so, why is the price climbing?

Well, let me share a secret - the demand is Chinese sneaking money out of the
country. I know friends who help their buddies and charge a two-digit
percentage to move their money out of mainland China. Here in Orange County,
there are a lot of Chinese buying houses with cash, and it's a similar
situation in the Bay Are, Vancouver, etc. Given more, and more people sneak
out, the demand grows as well. The US is fine because fresh money flows into
the US economy, but as we know, China realizes that even though some of the
people sneaking money out are possibly close to the government.

I have and cannot have solid facts to prove this, but everything pretty much
backs my theory and especially the correlation that the harder pressure China
does, the higher the price goes!

But for you, it won't be a nice thing to hear one day that there's a total
crackdown on this scheme and people who buy Bitcoin in advance to sell it
suddenly want to get rid of it!

~~~
mirimir
That makes sense to me.

But US KYC regs are strict, so I wonder how they exchange massive amounts of
Bitcoin to USD cash.

~~~
nikolay
I have accounts with most exchanges (including one of the first - Camp BX) and
I've passed thru their KYC checks and I can tell you that KYC is a joke!

------
ballenf
In the context of futures being a way for a farmer to finance the expenses of
growing a crop or raising a herd, isn't this a stretch of the use of the word
"future". I get that the word means a lot more today than its origins would
convey, but shouldn't the term used just be the generic "derivative" or
"index"?

Forgive my ignorance of the finance world, but it feels like they are
stretching definitions in order to frame this as approaching crude oil or pork
bellies when it's more of an options contract.

~~~
lrm242
No, they aren't. There are all sorts of futures contracts, and they are all
derivatives and none are indexes themselves. There are equity index futures,
single stock futures, foreign exchange futures, treasury futures, etc. Cash
settlement vs the ability to take settlement in the physical underlying is
where you might be getting confused, but they're all futures nonetheless.

~~~
CyberDildonics
Why do futures exist for something that can be settled in 30 minutes?

~~~
jeffwass
Suppose someone will pay you one bitcoin next week, as per some private
agreement.

For this discussion, let's entirely ignore credit risk (the risk this person
doesn't pay) but consider market risk.

Like it or not, you carry the risk of bitcoin fluctuations. You might be
comfortable receiving $6400 for your bitcoin next week. But bitcoin is
volatile. Maybe bitcoin jumps to $8000. But maybe it drops to $4000.

If you're comfortable giving up the upside, for a chance to prevent that
downside, this bitcoin future is for you.

You enter a future contract where you agree to sell one bitcoin in one week at
a price of $6400 (if that's the going one week forward rate).

In one week, your person pays you the agreed bitcoin, which you then sell to
the exchange and receive your $6400.

Meanwhile, for that week you can sleep at night knowing that if the bitcoin
market crashes, you still get your $6400. And if the market rallies to a
higher price, well missing out on that rally was the cost of being able to
sleep at night.

This is what commodity futures were originally used for, eg farmers agreeing
to sell their stocks at agreed rates without worrying about market
fluctuations.

Companies do this too, eg hedging their cost of fuel to a known quantity in
line with expected consumption.

