Back's slow start doesn't mean Bitcoin Futures has flopped

Galen Moore is a member of the CoinDesk Research team. The opinions expressed in this article are the author's own.

The following article was originally published in Institutional Crypto by CoinDesk, a weekly newsletter focusing on institutional cryptocurrency investments. Register for free here.

It's a lively time for bitcoin derivatives – or at least for those who write about them. For those who trade with them, it can be business as usual.

The Chicago Mercantile Exchange (CME) announced Friday that it is preparing to offer options on its bitcoin futures contract. This is a surprising move, because the volume of the option to date rounds to zero, as a percentage of reported volume in futures and exchanges.

Still, nobody in crypto has had an option counterparty as reliable as CME before.

The announcement gives CME a way to offer alternatives without having to build much new. Why should it? CME's bitcoin futures market represents a small percentage of the total volume.

Nevertheless, CME may feel a shadow of anguish for its leadership position in regulated crypto derivatives, with Bakkt launching a regulated futures contract this week which, unlike the Chicago Stock Exchange, is settled in actual bitcoin instead of cash.

After all, other people in Chicago are trading a lot of bitcoin, which seems physically determined future is important. Maybe the announcement from CME that it steals some of the Bakkt thunder.

Apropos Bakkt, its October 2019 monthly and daily contracts launched on Monday. First day volume in the monthly contract was just 71 BTC. It's pretty anemic, compared to the launch of the CME product in December 2017, which isn't necessarily apples to apples, given CME futures launched near bitcoin's all-highs.

Baked-days futures contract is the more exciting product of the two. It could be anything from a CFTC-regulated fiat onramp to a duplicate of the popular, permanent exchange of BitMEX, if traders use the T + 2 settlement to build a forward curve and continue to roll contracts.

Currently, traders are not & # 39; t. The volume in Bakkt & # 39; s one-day futures was up 2 BTC on Monday.

Persistent myth

The first regulated futures for bitcoin came in December 2017, just before the bitcoin price began a long slide down 83 percent from that time. However, with volumes below $ 100 million, it would be difficult to claim that futures trading made sense to the markets.

Instead, slow demand for the new product is more likely to punctuate the myth of institutional demand for bitcoin exposure, nicely backed up by compliance departments' insistence on a regulated product.

That myth is alive and well today among retail-focused cryptanalysts, as a search for "backed volume fail" will show you. If you were around in 2017, you didn't need time travel to know about short bitcoin on Monday: you had seen this movie before. Even the least sober of us in 2019 recognizes the obvious that institutional investors' interest in bitcoin is slowly developing as it develops at all.

For institutional investors, derivatives offer readily understandable solutions to operational barriers related to custody, investability and risk. (Regulated futures for bitcoin are structured in the same way as futures in, for example, frozen concentrated orange juice.)

Today, the bulk of the volume is on unregulated stock exchanges that do not act as clearing houses and offer leverage up to 100X.

These products may not be of interest to any regulated asset manager, but they are interesting.

Despite persistent doubts about the reliability of their reported volume (especially with OKEx and Huobi), bitcoin traders on the largest over-the-counter (OTC) trading tables know that there is liquidity in these markets. Their hedging strategies depend on that liquidity.

Other than that, the volume of these obtained trades is probably all crypto-hedge funds, and as a trader it expressed to me, "degenerate players," trading on their own accounts.

Bitcoin futures are structured much like futures of orange juice concentrate, but everyone knows that orange juice concentrate, when mixed with more volatile things, can become quite flammable. There are important qualities that differentiate bitcoin from other asset categories, and these characteristics of the underlying are taken into account by institutional investors who consider bitcoin derivatives.

For example, it may not be natural hedges in a bitcoin futures market. If you don't think so, you can compare the global operating expenses of gold miners with those of bitcoin miners. This is not Kansas.

The Way Forward

Derivatives may be gold bricks that pave the way for institutional investment in bitcoin, but it's a long way to Emerald City. Right now, CME's futures volume is as good a guide as investors' progress along that path.

You may have seen charts showing the increase in CME volume in May. That increase also coincided with a double increase in the price of bitcoin. Measured in bitcoin terms, the futures volume in CME increased in July and is now back with a modest growth rate above Q1 levels.

Meanwhile, there are no fewer than four other startups preparing new derivatives for US institutional and other regulated markets. Everyone is focused on physical settlement.

It remains to be seen whether physical delivery will be a feature that forces market participation. It is not always very important in derivatives based on other asset categories.

One thing seems certain: no new financial instrument is likely to "unlock" institutional demand, since most institutions are only beginning to answer the question of why they want to invest in bitcoin in the first place.

(Thanks to the team at for their data and input.)

This analysis is based on an upcoming white paper on crypto real estate derivatives. Look for it later this week at watch via Shutterstock

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