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Galen Moore is a member of the CoinDesk Research Team. The opinions expressed in this article are those of the author.
The following article originally appeared in Institutional Crypto by CoinDesk, a weekly newsletter devoted to institutional investments in cryptographic assets. Sign up for free here.
It's a living time for bitcoin derivatives – or at least for those who write about them. For those who negotiate, things may be going normally.
The Chicago Mercantile Exchange (CME) announced on Friday that it was preparing to offer options trading on its bitcoin futures contract. This is a surprising move because the volume of options to date is rounded to zero, as a percentage of the volume reported in futures and swaps.
However, no one in cryptography had an option counterpart that was as reliable as CME.
The announcement gives CME a way to offer options without having to build a lot of new builds. Why should he? CME's bitcoin futures market represents a tiny percentage of its overall volume.
Nevertheless, CME is perhaps a bit concerned about its leading position in the regulated markets for cryptographic derivatives. Bakkt launched this week a bitcoin regulated futures contract which, unlike the Chicago Stock Exchange, is settled in bitcoins rather than in cash.
After all, other people in Chicago who trade a lot of bitcoins seem to think that the physically regulated future is important. The announcement made by CME allows him to steal some of Bakkt's thunder.
Speaking of Bakkt, his monthly and daily contracts for October 2019 were launched on Monday. The initial volume of the monthly contract was only 71 BTC. It is rather sluggish compared to the launch of the CME product in December 2017, which is not necessarily synonymous with apple apples, since CME futures have been launched near the highest bitcoin records.
The Bakkt one – day futures contract is the most intriguing product of both. This could be an agreement between a fictitious CFTC-regulated law and a duplicate of the popular perpetual BitMEX exchange, if traders use its T + 2 settlement to create a futures curve and continue to execute the contracts.
Until now, traders are not. The volume of one-day Bakkt futures was 2 BTC on Monday.
Persistent myth
The first bitcoin regulated futures contracts arrived in December 2017, just before the bitcoin price began to fall by 83% from its peak. However, with volumes below $ 100 million, it would be difficult to argue that futures have hurt markets.
Instead, it is more likely that weak demand for the new product will have broken the myth of institutional demand for bitcoin exposure, hidden behind the insistence of compliance services on a regulated product.
This myth is alive and well today among retail-focused cryptographic "analysts", as evidenced by the search for a "bakkt volume failure". If you were around in 2017, you would not need to travel back in time to read a bitcoin on Monday: you had already seen this movie. Even the least sober among us in 2019 recognize the obviousInstitutional investors' interest in bitcoin is growing slowly.
For institutional investors, derivatives offer well-understood solutions to operational barriers related to preservation, investability and risk. (Bitcoin regulated futures are structured in the same way as concentrated futures contracts, for example, in frozen concentrated orange juice.)
Nevertheless, today, the lion's share of the volume concerns unregulated stock exchanges that do not operate as clearing houses and offer leverage up to 100X.
These products could not interest any regulated asset manager, but they are interesting.
Despite persistent doubts about the reliability of the reported volumes (especially with OKEx and Huobi), bitcoin traders on the largest OTC (OTC) trading offices know that there is liquidity in these markets . Their hedging strategies are based on this liquidity.
Aside from this, the volume of these leveraged deals probably concerns all crypto hedge funds and, as one trader told me, "degenerate gamblers" trading on their own behalf.
Bitcoin futures are structured much like orange juice concentrate futures, but everyone knows that orange juice concentrates, when mixed with more volatile substances, can become quite flammable. There are important qualities that distinguish bitcoin from other asset classes and these qualities of the underlying are taken into account by institutional investors valuing bitcoin derivatives.
For example, there may not be natural hedging on a bitcoin futures market. If you do not believe it, compare the global operating expenses of gold miners with those of Bitcoin miners. It's not Kansas.
Road ahead
Derivatives can be gold bricks paving the way for institutional investments in bitcoin, but it's a long way to go to the Emerald City. At present, the volume of CME futures is as good a guide as the progress made by investors in this path.
You may have seen graphs showing the increase in CME volumes in May. This rise also coincided with a double increase in the price of bitcoin. Measured in bitcoins, CME futures volume surged in July and is now trading at a modest rate of growth relative to the first quarter.
At the same time, no less than four other startups are preparing new derivative offerings for the US institutional and other regulated markets. All are focused on physical regulation.
It remains to be seen whether physical delivery will be a feature that will require participation in the market. This is not always very important in derivatives based on other asset classes.
One thing seems certain: no new financial instrument is likely to "unblock" institutional demand, as most institutions are just beginning to answer the question of why they would invest in bitcoin.
(Thanks to the team at www.sk3w.co for their data and contribution.)
This analysis is based on a forthcoming white paper on the state of crypto-asset derivatives. Look for it later this week on coindesk.com/intro-to-crypto-investment.
Bitcoin clock via Shutterstock
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