Futures May Not Be The Way Of Crypto’s Future

bitcoin token

For bitcoin, and perhaps cryptocurrencies in general, does the future lie in … futures?

As reported this week, the first bitcoin futures contracts that in turn settle in that marquee name in crypto started trading Monday (Sept. 23).

Thinly, as Bloomberg noted. The move is being heralded as a “new chapter” in bitcoin’s storybook.

The initial foray of the Bakkt/ICE futures on the Bakkt Exchange does indeed seem muted. In New York, trading came in at 71 futures contracts. In intraday trading, the price of bitcoin was up a bit, to $9,892. As of this writing, one bitcoin fetches $9,442 and change.

In initial commentary, as bitcoin futures trading trickled in, five contracts, then 10, “I’m shocked there isn’t any volume,” said LevelTradingField CEO Lanre Sarumi, as reported by CoinDesk. “I absolutely thought that contract was going to fly out of the gate. Very odd.”

Let us note that futures, generally speaking, are a time-tested trading vehicle — in fact the concept is, well, ancient. Futures simply represent a contact between two parties to transact in a commodity or asset on a date in the future (hence the name) at an agreed, preset price. Upon expiration of the contract, the transaction takes place at the preset price, regardless of where the spot market may be pricing the underlying holding.

So, for example, a futures contract for, say, a certain amount of bitcoin at $9,000 next month would be executed at $12,000 even if the digital coin itself changes hands elsewhere, in the general market(s) at $10,000. The long position, which is the buyer, buys the bitcoin at $12,000, the short position (seller) sells it at $12,000. That’s the classic trade of people actually desiring to hold, buy and sell the financial device itself. But there’s also the ability to speculate (bet) on what the assumed price of bitcoin may be at a defined date in the future. Buyers and sellers of the contracts themselves speculate on bitcoin without having to, well, own bitcoin.

There have been other exchanges trading bitcoin futures, notably the CBOE Futures Exchange and the CME Group. The Bakkt launch allows for settlement in 30 day contracts and one day contracts — and settling in bitcoin means the cryptocurrency must be delivered (not dollars).

Will this indeed be a stepping stone to more bitcoin in coffers and digital wallets? It’s important to note that trading in futures is speculating on price, and trading in bitcoin is also, in a way, speculating in price, since a pricing “foundation” that might be set by widespread use of bitcoin in commerce has yet to be established.

The ICE contract does have some blessing from regulators, having been given the go-ahead by the Commodity Futures Trading Commission over storing the bitcoin tokens.

In other crypto exchange news, Binance U.S., which operates as the U.S. unit of the exchange firm Binance, has said it will list seven cryptos this week, including bitcoin, Ethereum and a number of others. The trading will be crypto-to-fiat and crypto-to-crypto pairs.

And yet, may the leap to exchanges for futures, or other trading, run into stumbling blocks?

CCN reported last week that the Financial Action Task Force (FATF), which is an inter-governmental body, has anti-money laundering (AML) standards in place that enforce what is known as a “travel rule” where transactions over $1,000 need to be identified. We have seen in the past that this has led to some delistings of alt coins on privacy concerns. For exchanges, becoming fully FATF compliant now has another regulatory consideration.

Separately, no less a weighty voice than Securities and Exchange Commission (SEC) Chairman Jay Clayton has chimed in that bitcoin will need to be more strongly regulated before it trades on major exchanges.

“If [investors] think there’s the same rigor around that price discovery as there is on the Nasdaq or New York Stock Exchange ... they are sorely mistaken,” said Clayton, the opening speaker at the Delivering Alpha conference, presented by CNBC and Institutional Investor and as reported by CNBC. “We have to get to a place where we can be confident that trading is better regulated.”

Clayton has said that “some kind of funds structure” may be in the offing to get retail investors into markets and on exchanges (including, presumably and eventually, cryptos). But then again, the SEC has been mulling ETF crypto listings  for a while, amid worries about price manipulation. In recent news, too, VanEck and SolidX withdrew a joint bitcoin ETF proposal earlier this month, indicating that enthusiastic trading on exchanges may not be in the (near term) future just yet.



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