Bitcoin gains more currency with forthcoming futures market

Published on Tuesday, 31 October 2017 17:55 - Written by Robert Channick, Chicago Tribune (TNS)

With the price of bitcoin soaring, the CME Group announced plans Tuesday to launch a futures contract on the digital currency by year-end, offering a trading platform for investors - and perhaps some legitimacy for skeptics.

The new contract, pending regulatory approval, will be based on the daily bitcoin reference rate, which topped $6,400 Tuesday and is up 500 percent for the year, drawing increasing interest from traders, according to Chicago-based CME, the world’s leading derivatives marketplace.

While the bitcoin contract could provide a robust trading platform for investors, it may not do much to turn the arcane digital concept - begun less than a decade ago by anonymous computer developers - into a widely used currency, experts say.

“It makes complete sense from the perspective of the pricing game. It’s a traders’ game right now,” said Aswath Damodaran, finance professor at New York University’s Stern School of Business. “It does absolutely nothing in advancing bitcoin’s cause as a digital currency.”

Created in 2009, bitcoin is a peer-to-peer digital payment network with no central bank. Bitcoins are created by “mining,” where individuals are rewarded for their services to their network. Over time, a maximum of 21 million bitcoins will be put into circulation.

The “artificial scarcity” model is great for trading but not so much for adoption as a global currency, Damodaran said.

“What they saw when they originally created bitcoin was gold for the millennials,” he said. “You can’t create a currency that’s a crisis currency for paranoid geeks and expect it to become a widely used currency for transactions.”

In November 2016, the CME and London-based Crypto Facilities introduced the bitcoin reference rate, which aggregates trading from major bitcoin spot exchanges to calculate a daily price. This year, bitcoin pricing has risen from less than $1,000 to a new intraday high Tuesday of $6,415.

The bitcoin market capitalization has grown to more than $100 billion.

“The reference rate as part of a futures contract … allows people to manage their risk as the bitcoin market develops,” said Laurie Bischel, a CME spokeswoman.

Given the pricing volatility of bitcoin, the futures contract will offer an opportunity for traders to speculate on continued appreciation. In July, Ronnie Moas, founder of Standpoint Research, set a $50,000 price target on bitcoin by 2027.

“That’s my conservative target,” Moas said. “I think you could hit $100,000 by five years from now.”

Moas predicted that bitcoin and cryptocurrency will replace the traditional banking system and supplant gold as an investment vehicle. He said the CME futures contract is “a stamp of approval” that will open the door to other trading platforms such as an exchange traded fund, which he said would encourage broader investment in bitcoin.

“The floodgates will open,” Moas said. “The price of bitcoin will double overnight when that happens. It is not easy for the average person to buy bitcoin right now.”

Others are not so bullish, including investor Warren Buffett, who recently called bitcoin a “real bubble.”

The same volatility that makes bitcoin attractive to investors may be scaring away some businesses contemplating its use as actual currency, NYU’s Damodaran said.

“What makes it so attractive as a speculative investment makes it awful as a currency,” he said. “If you’re a shopkeeper, you don’t want to put your prices up in bitcoin - you’ll have to keep changing those prices a dozen times every day.”

Damodaran said bitcoin will have to stabilize and become more “boring” to gain widespread adoption. He also expressed misgivings about bitcoin as an investment alternative to gold.

“At least if you trade gold, you end up with something shiny at the end that you can hold on to,” Damodaran said. “If bitcoin doesn’t become a currency, what the heck do you have five years from now?"