With Wall Street being left out of the Bitcoin gold rush, it was only a matter of time before regulatory oversight would eventually catch up and create a trackable index for the financial world to take advantage of cryptocurrencies.
Now, it’s official: Wall Street has the green light to track Bitcoin.
CME, the world’s biggest exchange owner, and Cboe, are weeks away from launching Bitcoin futures contracts. Both entities received permission to do so after pledging to U.S. regulators that they comply with the law. In addition, Cantor Exchange will offer Bitcoin binary options.
There are some key differences for Bitcoin as compared to traditional futures and options contracts.
With a futures contract, a buyer has no cost up front, but must then pay the full cost of the contract and accept delivery of the asset within a specified time unless the trader then sells the futures contract. However, with Bitcoin, there is no asset to physically take delivery of. This means that all contracts will need to be cash settled.
“I think a few of the interesting things about this contract from what I have gathered is that there is
…no physical delivery. The contract is based on the Bitcoin Reference Rate (BRR) on the CME. It’s just trading flow of bitcoin from the major exchanges: Bitstamp, GDAX, itBit, Kraken. So because it’s “cash settled” you get to trade bitcoin and not ever have to handle it.
There will be circuit breakers which is both good and bad for traders and investors. Lock limit on a circuit break (I hear the percentage could be as small as 7%) would mean no one gets in or out. Which creates a panic all it’s own.
The contract is five coins. The margin is still to be decided. But simple math says that the requirement could be $10k to control five coins.
The shorts (hedges) are going to pile in. Just like farmers/commercial interest in commodities, miners and institutions will short. Once there is a hedge like what futures will offer, I do see volatility calming down.
Crypto-funds are on the rise 100+. AUM is not high, yet. That’s probably about to change.”
Raghee Horner, Simpler Trading
Now that institutional investors and Wall Street traders can get in on the mix, we can expect the IRS and the federal government to update and reform policy around cryptos. The new contracts announced this morning are subject to oversight by the Commodity Futures Trading Commission, with all three participating exchanges pledging to help monitor and regulate the new market.
Currently, cryptocurrency trading is mostly unregulated, which was the intent behind the creation of Bitcoin following the 2008 financial crisis. The government has steered clear, other than to classify Bitcoin as property, subjecting it to capital gains tax. Bitcoin’s market cap isn’t large enough for the Federal Reserve to enact fiscal policy around it, leaving cryptocurrency in a murky area. However, as Wall Street starts trading Bitcoin products, regulations will be implemented to expand what products can be offered.
Exchanges profit from increased trading volumes. This means that the more products they can offer equals more profit for the exchanges. That gives the exchanges incentive to implement more regulation and actively police the new products. CME, for example, increased the margin requirement for BTC contracts.
According to Cboe President Chris Concannon, the launch of the futures will “create pricing equilibrium in the market” and allow traders holding Bitcoin to hedge their risk. “These products allow them to hedge, and to take opposing views”.
With a flood of new money ready to rush in, Bitcoin prices will most likely surge more. However, given how quickly prices have soared, many traders who now have the opportunity to short Bitcoin may do so, making the initial surge a short lived one.
Friday’s milestone regulatory decision is a major step forward in pushing Bitcoin into the financial mainstream. But Bitcoin is still a new asset class. Everything we’re seeing is new ground. However, thanks to Wall Street’s patterns, there’s a good chance that the next Bitcoin product to hit the markets will be an ETF.
In March, the SEC rejected the first Bitcoin ETF proposal by Tyler and Cameron Winklevoss, creators of Gemini exchange, citing a lack of a trackable index. Now that there can be prices and an asset to track and regulate, Bitcoin ETFs are not only possible, but extremely likely.