Bitcoin Futures Might Be Coming Soon
15 November 2016 - 5:10AM
Dow Jones News
Bitcoin has moved one step closer to mainstream credibility
after the world's largest futures exchange operator launched a pair
of indexes designed to track the virtual currency's price.
The gauges from CME Group Inc. could be used as building blocks
for futures contracts that would make it easier for both
professional and individual investors to trade bitcoin.
The new CME indexes "are clearly precursors to a listing of some
kind" of futures contract, said Daniel Masters, chief investment
officer at Global Advisors (Jersey) Ltd., which manages $25 million
in bitcoin assets. "There is tremendous pent-up demand in the U.S.
for bitcoin exposure that doesn't require an investor to select one
of the current bitcoin exchanges in order to invest."
Trading the virtual currency can be logistically tricky. Since
U.S. brokerages generally don't offer a way to trade it, people who
want to buy or sell it need to set up accounts directly with a
bitcoin exchange. There are dozens of such exchanges around the
world, many of them small and lightly regulated. But if major
players such as CME launch exchange-traded funds or futures tied to
bitcoin, investing in the digital currency would become similar to
trading stocks or commodities.
By entering the bitcoin space, CME is associating itself with a
virtual currency with a questionable past. Bitcoin has been linked
to criminal enterprises such as Silk Road, the online drug bazaar
shut down by the FBI in 2013. It is also notoriously volatile, with
the price of a single coin jumping from $552.82 in August to about
$700 today, according to CoinDesk.
CME could be risking its reputation by teaming up with the murky
overseas bitcoin exchanges where prices are set, said Mark T.
Williams, a lecturer at Boston University and critic of the digital
currency.
"Bitcoin pricing is still in the Wild West stage with
unregulated bucket shops influencing daily price discovery," Mr.
Williams said.
The reputation of bitcoin exchanges has been tarnished by
regulatory scrutiny and a series of high-profile cyberattacks. In
August, the Hong Kong-based digital currency exchange Bitfinex said
it was hacked, resulting in the theft of more than $60 million
worth of bitcoin.
CME said its new indexes are based on data contributed by six
bitcoin exchanges, including the international arm of China-based
OKCoin, whose mainland Chinese platform is the world's most active
marketplace for trading the digital currency, according to
bitcoinity.org.
"Our products launched will bring greater transparency to the
bitcoin market," said a CME spokeswoman. "We have a long history of
developing nascent markets across asset classes for this same
reason."
The bitcoin exchanges contributing data to CME's indexes "have
been extensively vetted," the spokeswoman added.
CME declined to comment on whether it planned to launch bitcoin
futures. The exchange operator would need approval from the
Commodity Futures Trading Commission before it could move ahead
with such a listing.
The new CME indexes shed light on a brewing battle among
exchanges to cash in on the seven-year-old digital currency. Bats
Global Markets Inc. is seeking regulatory approval to list an ETF
linked to bitcoin prices that was developed by Cameron and Tyler
Winklevoss, the twin brothers and entrepreneurs made famous by
their early role in the creation of Facebook Inc.
The Securities and Exchange Commission is expected to decide
whether to allow the proposed ETF by the Winklevoss brothers by
early next year. There is already an ETF-style product called the
Bitcoin Investment Trust available to U.S. investors, but it trades
in the lightly regulated over-the-counter markets and has a spotty
record of tracking the price.
The New York Stock Exchange started publishing a daily U.S.
dollar price index for bitcoin last year. CME is seeking to one-up
NYSE by introducing both a daily index and a real-time index
updated every second, saying it has the best methodology for
calculating a bitcoin benchmark. The real-time index went live on
Sunday, while CME's first daily index started Monday.
The Chicago-based exchange giant said it designed its new
indexes to comply with international standards for the regulation
of financial benchmarks. An independent oversight committee will
help ensure the gauges aren't prone to gaming by unscrupulous
traders, CME says.
"Non-susceptibility to price manipulation is a core principle
that is very important," said Sandra Ro, executive director and
digitization lead at CME.
Write to Alexander Osipovich at
alexander.osipovich@dowjones.com
(END) Dow Jones Newswires
November 14, 2016 12:55 ET (17:55 GMT)
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