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Noelle Acheson is a veteran of Business Analysis and a member of CoinDesk's product team.
The following article originally appeared in Institutional Crypto by CoinDesk, an information bulletin aimed at the institutions market, with news and views on cryptographic infrastructure delivered all Tuesdays. Register here.
Last week, Cboe informed its traders that it would not renew its bitcoin futures.
This was seen by many as a sign that expectations of an institutional interest for cryptographic badets were misplaced, and by some as a nail in the coffin of cryptography.
If an important place like Cboe does not see a future to offer a product that institutional investors would supposedly need, it is obvious that there is no demand, right? And if institutions do not bring their money and legitimacy to the market, where will the necessary cash come from?
As usual, the reactions are exaggerated. The news is neither meaningful nor bad for the sector's prospects. However, it highlights the recurring role of misplaced expectations in the conduct of market narratives.
Natural selection
Cboe was the first traditional institution to offer bitcoin futures, launched in December 2017. It was followed a week later by a similar product from CME. In the end, although volumes declined in both cases, institutional investors seemed to prefer the CME product. Let's see why.
First, the CME is larger than the Cboe Futures Exchange and, in the standardized markets, size matters. Brokers would logically prefer to trade on a platform where they already have connectivity.
Second, settlement methods are important because they determine the profitability of a position.
Cboe used the Gemini auction price to determine the value of its contracts – a set price once a day on a limited volume. The CME is based on an index consisting of data from a few liquid exchanges. Although the reliability of this pricing method was also questioned, it appears that institutional traders considered the index as the least manipulable of the two options.
The suspension of a particular type of Bitcoin futures contract generally says more about the structure of the product than about the underlying product and is far from an isolated incident.
According to some estimates, more than half of the term launches do not reach a critical mbad and simply disappear.
Not much
Withdrawal of this product is unlikely to have a significant impact on trading strategies. Volumes were low, and since CME announced its intention to continue offering its version, those who used Cboe could relatively easily switch to the more liquid contract.
In addition, the usefulness of cash-settled derivatives to hedge Bitcoin positions is controversial. Many claim that what the market needs are regulated and physically regulated bitcoin futures. These will make the market more robust by providing more reliable and less manipulable coverage.
With cash-settled futures, the value of the product depends on market information, which can be manipulated in a relatively illiquid market. With physically established futures contracts, you take delivery of the underlying bitcoin. You can then keep the badet or sell it on the market at a "real" price.
The eventual launch of Bakkt and ErisX, which plan to offer physically established bitcoin futures, will provide an alternative product to the panoply of institutional tools.
But those who expect physically delivered futures to be the trigger that drives institutional players into the volume market are likely to be as disappointed as those expecting futures contracts delivered in cash. to achieve this feat.
Looking for signs
This is the main conclusion of this news: there is no "key" to institutional participation. And no matter how many of us recognize that we have identified the missing piece, we will be wrong.
The theory that institutions would be involved has been consistent – the supposed trigger, however, has shifted from derivatives to conservation-to-regulation solutions (and I may miss a few steps in there). clarity continues to emerge without corresponding price increases.
By looking for something simple to grasp and monitor, we try to integrate the birth of a new badet clbad into a practical linear progression. We try to integrate a five-dimensional concept into a one-dimensional construct – and, yes, it's as impossible as it sounds.
Identifying stories is a necessary step, however, which allows us to separate the signal from the noise and shape investment theses and production decisions.
The narrative that institutions are interested in cryptographic badets is strong. Many are already investing in this market. Family offices and traditional hedge funds have weighed heavily for quite some time now, and we even see old school institutions such as pension funds and endowments starting to take this new clbad of business seriously. badets.
We are wrong when we expect the institutions to wait for a specific green light. In reality, they expect a matrix of signals that does not conform to our linear thinking.
Even if a glance at the titles of CoinDesk reveals it, the change happens in a subtle and obvious way. Technology is progressing, regulators are working hard to find the right strategy, and investors of all types are learning and experimenting.
This progress may seem slow, but it provides a solid basis for acceleration. To think that we can predict when this will happen is ambitious.
To steal a sentence in Hemingway, the institutional investor's involvement in cryptographic badets will be "gradually, then suddenly." As do almost all the deep changes.
John Tornatore, Cboe Global Markets, image via CoinDesk Archive
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