Bitcoin has debuted on a trader’s market. Futures on the crypto-currency landed on the Chicago Board Options Exchange (Cboe) last Friday, and surged 26% in value over the course of the day. Futures are financial contracts obliging the buyer to purchase an asset or the seller to sell an asset, such as a physical commodity or in this case, a financial instrument.
The surge of Bitcoin futures was so significant that two emergency measures were activated during play, in an attempt to slow its rise. Bloomberg Technology also claims that traffic on Cboe’s website was so significant that temporary outages occurred.
“It’s now beyond doubt – Bitcoin has been accepted by the mainstream. Professional investors, who’ve been jealously watching others recoup massive gains, will snap up these derivatives like hot cakes,” blockchain expert Dug Campbell, told DIGIT.
The launch of Bitcoin futures marks the beginning of a new chapter for crypto-currency as a whole. Bitcoin’s meteoric rise this year has seen a hundredfold increase in efforts to mine the currency, and the power consumed in the mining process now outstrips the demands of 159 of the world’s countries. Bitcoin’s current value is over $15,000 for a single coin.
Investors remain conservative despite ‘stability’
But many investors remain unconvinced. Leading figures from Wall Street such as Jamie Dimon, CEO of JPMorgan, have branded Bitcoin a ‘fraud’. Last week, Nobel laureate and former Chief Economist of the World Bank Joseph Stiglitz asserted on Bloomberg TV that Bitcoin, “ought to be outlawed“.
Dug told DIGIT: “Funds will continue pile in and I would expect to see price stability as the primary result. But it’s not all good news. To me, I can’t hear the word ‘derivatives’ without also hearing Warren Buffett famous description of them as ‘weapons of financial mass destruction’.
“We all know that the market is hyped and it’s not hard to see Bitcoin derivatives becoming a bigger market than Bitcoin itself. In my mind, there’s still a disconnect between the requirements of an evolving technology (as opposed to currency) and an established legacy financial system that needs worked on. There will be a few bumps along the way.”
The landing of Bitcoin on the Cboe on the day saw a smooth but marked rise, despite the two minutes-long trading halts. The spot price of Bitcoin (not its futures) climbed 4.7% to $16,383 by the close of trade on Friday evening in New York, according to Bloomberg. This was a significant price hike over the day, but strategists have suggested that this was to be expected given the novelty of the asset and the difficulty of using cash-settled futures to trade against the spot.
Furthermore, the market cap for Bitcoin worldwide is still approximately $250 billion (of the $420 billion cap for all crypto-currencies) – a very small fraction of the total mass of the world’s trading assets including debt markets, stocks, and derivatives. Jim Edwards, Founding Editor of Business Insider UK, remarked in the magazine: “A bitcoin crash might not be big enough to dent the real economy.”
Willie Fleming, Project Director for Scotcoin, told DIGIT on the movement of Bitcoin: “Over the weekend it didn’t budge a lot. I didn’t see it moving much more than $100 either side of $15,000. So you can possibly say that there is a little more stability, but all these terms are incredibly relative. Obviously wherever there are waves there will be traders rushing in and trying to make the most of it. That in itself is causing ‘congestion’ on the blockchain and a real backlog of transactions. There are no fundamentals in this game.”
Dug told DIGIT: “It’s early days, let’s wait and see. I’ve been keen to see this day for a while but from conversations with industry insiders, I still have a feeling that things may have been slightly rushed to get the futures launched. It’s still not clear to me how the contracts will deal with unexpected hard forks for example (such as the Bitcoin Cash split on 1st August this year) – and given the history of the last nine months, I’d be amazed if the Bitcoin community doesn’t have more hard discussions ahead.”
The Cboe contracts, which will be soon followed by similar offerings on the CME Group Inc. and Nasdaq Inc., could make the currency more stable. Bitcoin trading before now has been carried out with limited insight, deterring incumbent money-men from trading and increasing the possibility of cyber-attack.
Bloomberg has predicted that the new contracts could usher in the regulation of Bitcoin. Indeed, both the Cboe and CME gained permission to trade the contracts on December 1st only after promising the U.S. Commodity Futures Trading Commission that the products run on the right side of the law, through a self-certification process.
Willie noted: “Already there’s lots of steps towards regulation. The Scotcoin Project involves a permissioned blockchain, because we know that regulation is coming sooner rather than later. Just how much regulation you’re going to be able to put on an unregulated blockchain, such as Bitcoin, without totally hobbling it I don’t know. They will try. They will try clumsily. They will probably fail. But there will always be the clamour for regulation, especially from those who don’t fully understand it.
“In the long run I think the permissioned blockchain will win out, certainly on the currency side of things, despite the myriad of uses that both present.”
Dug added: “I’m not a fan of massive regulation here. It’s still very early and, as China found out this year, trying to control a global technology is much like using a brush to keep the ocean off the beach. But if you’re now involving legacy financial institutions, they absolutely need to follow processes – and be kept in check.
“Because of the steep learning curve, individual Bitcoin holders over the years have been mostly aware of the risks involved. But once Bitcoin starts getting packaged up into nice, marketed financial products by trusted brands and sold to the masses, I think there’s clearly a need to protect those who can’t be expected to understand the technology (or risks).”
As with the Bitcoin market cap vs worldwide stock assets, Cboe futures account for only a tiny slice of the world’s bitcoin-related bets. The value of Bitcoin contracts traded in the first eight hours of Cboe trading on Friday totalled about $40 million, versus the $1.1 billion worth of Bitcoin traded during the same period, according to Bloomberg who cites Cryptocompare.com.
Dug urged: “There’s no doubt that today marks another unique day in a unique year for Bitcoin. But then again, when have we ever not been able to say that?! But we’ve entered a new stage. And if there’s one thing that I’ve learned from being around Bitcoin for quite a while, it’s that no-one has consistently been able to predict the details.
“The only thing we know for certain is the general direction of travel. Crypto-assets and decentralisation are both here to stay, and I’d urge more people to spend the time working to understand why this is such a significant stage for society.”
Scotcoin is a crypto-currency for Scotland and the world. You can get Scotcoin here.