I read yesterday that Cboe is bringing forward the launch date for its Bitcoin futures contract in a bid to usurp its rivals at the CME. This set me thinking about the likely impact of these contracts on the price of Bitcoin itself. As my good friend John Lothian has always maintained, futures markets are all about risk transfer and not irresponsible gambling (as some in the mainstream press would have you believe). But, in order to transfer risk, I need to be able to form a view about the value of the underlying asset. So, for example, I can look at the price of oil and make some assessment about what OPEC is likely to do, the state of the US shale oil industry and the latest on Venezuela’s default. Then I layer on a few macro factors – Trumpy, Rocket Man, the Brexit Fiasco – look at my own position and form a view as to whether I am a net buyer or seller of oil in the future. Regardless of whether I am a merchant or a speculator, the point is that I can form a personal view, based on facts relevant to the underlying asset. Because it is my own view, it will likely be contrarian to yours and this difference, or “risk”, is then what is so effectively transferred by futures markets.
So tell me then, how on earth do I do this with something like Bitcoin? Despite its meteoric rise, the price of Bitcoin has whipsawed sometimes by as much as 20% per day as fear and greed run like an alternating current through Bitcoin exchanges. By offering Bitcoin futures, the exchanges concerned are legitimising the underlying asset and the thousand or so other cryptocurrencies in circulation. So will this really help stabilise those price fluctuations or simply allow the ill-informed to get in on something they don’t fully understand or don’t know how to buy? If this is so, then it doesn’t sound much like risk transfer to me.
Don’t get me wrong, there will undoubtedly be fortunes made and lost on cryptocurrencies (apparently, a quarter of all Bitcoins mined so far have already slipped down the back of electronic sofas). So I wonder how we will look back on this new chapter in the never-ending Bitcoin story?
Now, as for tulips, that’s completely different…