The Chicago Board Options Exchange (Cboe) has announced that it will not release futures for Bitcoin with new maturities into its product line at least until the beginning of April. What does this mean, and what are the implications of this solution for the crypto market? DeCenter will review the issue.
The Cboe Strikes
The Cboe’s decision to refuse to launch Bitcoin futures in March is a severe blow to the authority of cryptocurrencies. As Emin Gün Sirer, a professor at Cornell University, noted, “Maximalism wasn’t good for Bitcoin.” Immediately, we denote that an adverse impact does not mean that the market immediately went down. This did not happen; moreover, this week, Bitcoin is confidently trying to consolidate above the $4,000 mark. There is no talk of immediate influence on the market, which, incidentally, emphasizes once again that the cryptocurrency market has been resistant to both positive and negative news in recent months, moving along its trajectory, in which analysts are trying to guess the patterns of past years.
The Cboe is the first classical financial platform in the world, which started trading in Bitcoin futures on December 11, 2017. It was non-deliverable financial instruments that immediately opened up the opportunity for institutional investors to invest in Bitcoins not directly but through this derivative. Moreover, it does not involve the purchase of “physical” cryptocurrencies; it is a settlement under fixed-term contracts, which is carried out by way of arbitration through fiat. On December 17, 2017, Bitcoin reached the as of yet unrestored historical maximum of $20,085. At this point, similar tools appeared with the CME Group, another traditional stock exchange located in Chicago. Bitcoin was located on the recovery track not in December, but as early as November, and went down after reaching the historical maximum.
What was going on? Christopher Giancarlo, the head of the Commodity Futures Trading Commission (CFTC), believes that, firstly, the launch of Bitcoin derivatives led to a decrease in its price, and secondly, its correction by 80% from the peak is a “positive event.” The opinion of the official is curious. It turns out that attracting institutional investors has played in the direction of lowering the price of this asset. On this basis, as Bakkt asserts, the possible future emergence of Bitcoin futures, albeit different in content, but still hypothetically not guaranteed to be delivered, can send the flagship cryptocurrency to another downward correction much to Giancarlo’s joy.
Wall Street Never Considered Cryptocurrencies Seriously
In fact, the situation looks simpler. As Mati Greenspan, an eToro analyst, explains, “Wall Street was never interested in the democratization of finance,” or what decentralized cryptocurrencies offer. What does it need, then? Greenspan adds: “They saw Bitcoin as a way to make a quick buck and it seems some [the Cboe—DeCenter] got disappointed when that didn’t immediately pan out.”
At the same time, Emin Gün Sirer notes that the explanation of the situation, which was given in the Weiss Ratings, is not correct. Analysts of the company considered that the reason for the Cboe’s decision was that it did not see a sufficient request for this product from its clients, and at the same time, a competitor, the CME Group, is doing better. Therefore, in essence, this is only a redistribution force in the market. Indeed, users need to look at the details. At the Cboe, the nominal value of the contract is 1 BTC, and for the CME Group, it is 5 BTC. In such a situation, larger “wholesalers” are going to the sidelines. But in general, the trend is a recession and “low volumes of trade” can be observed on both platforms, and not only on the Сboe, as The Block CEO Mike Dudas also writes. But the main thing, according to Emin Gün Sirer, is that “Grown-ups build stuff & see them through, they don’t half a** and give up [meaning Bitcoin—DeCenter].”
Bitcoin ETFs Are No Longer Needed?
In this case, that dubious story,”—when the investment company VanEck was forced to withdraw its application for Bitcoin ETF because of the Cboe’s decision to “quit the game” and then still filed again, and again, together with the Cboe—became the first signal that the Chicago stock exchange began to curtail its short-lived “romance” with cryptocurrency derivatives. But this is exactly how everything looks, as stated by both analyst Alex Kruger and expert Frank Chaparro. That is, starting with July, such trade on the Cboe is likely to stop altogether, even though such tools are very convenient for the platform with their “without delivery” characteristic, as reported by analyst Trace Mayer. If there are no Bitcoin futures, will the Cboe be interested in starting to work with Bitcoin ETFs? Most likely, no. In any case, this may be a short-term story, as is the case with Bitcoin futures. Even from the point of view of the more than 10-year history of Bitcoin, the behavior of the Cboe shows that the organization halts its work with cryptocurrency derivatives all too quickly.
CME Group: “In the Same Boat” with the Cboe
What will CME Group do? The organization itself came up with a duty report that “no changes to announce re our Bitcoin futures contract.” If we look at the monthly dynamics, in January and February, there was an increase in the volume of trade on this site. But, one has to bear in mind that this was the effect of the low base of December 2018 and also the fact that it was during these first two months of the year that the CME Group conducted a number of marketing activities aimed at attracting players into futures, offering special prices for its services: all this will cease to play its role in March when such actions are terminated. Frank Chaparro is saying, “No. Cboe’s pause on bitcoin futures doesn’t mean institutional interest in crypto derivatives has waned.” But the graphs presented by him show that after July 2018, the volumes began to decrease, both on the Cboe and CME, so the analyst’s statement that the “Cboe was ‘crushed’ by CME Group” looks like an attempt at complacency.
Still, institutional investors are clearly playing their game. From here, as analyst Spiros Margaris correctly noted, the question of launching Bitcoin futures on Bakkt was “hung.” And one can hardly assume that “institutional players are waiting to enter the market at a new Bitcoin minimum,” as the trader under the nickname Sam suggests. Moreover, Mati Greenspan expects the return of institutional investors to the market only when the bullish run has already begun, and not before. Nor does he expect the emergence of a Bitcoin ETF anytime soon.
The Belief in Institutional Investors Persists, But…
Of course, the belief that institutional investors retain the interest in cryptocurrencies is widespread. The head of Three Arrows Capital Xu Zhu, as well as another trader, known under the nickname I am Nomad, both write about this. But it is obvious that none of the institutional players are in a hurry. This includes not only Bakkt but also Fidelity Digital Assets, which began working with a small circle of clients on the issue of cryptocurrency storage, but without details on how the digital purchase and sale deals are carried out if they take place at all.
What really interests institutional players is the creation of their own “cryptocurrency,” such as the JPM Coin, when the goal is to try to force Bitcoin out of the market field as the main competitor. In addition, the trend continues for corporations, banks, and payment services in receiving hundreds of exclusive rights to various aspects of blockchain and cryptocurrency activities—something that does not interest the decentralized cryptocurrency business. Meanwhile, such patents can later be used as an instrument of charges for any cryptocurrency processes, which ultimately will create a financial barrier to the development and innovation precisely the same as, for example, exclusive rights to medicines create excessive price pressure on the final product and limit the entry of other players into the market.
Bitcoin futures were a convenient toy, partly for the love of fads, as they appeared on the Cboe and CME Group. They are viewed the same way in Bakkt and Fidelity Digital Assets. In the world of classical finance, interesting financial instruments are not so easily abandoned, even if the Cboe has a market share of about 5% and CME Group of 95%—$5.6 and $98.9 million, respectively—based on turnover data for February. According to The Wall Street Journal, we are seeing “the latest sign that mainstream financial firms are losing their enthusiasm for cryptocurrencies.” This is also noted by renowned hedge manager Mark Dow.
Indeed, we will again discover a great interest in cryptocurrencies in general and Bitcoin in particular when the next cyclical rally comes along. But this recovery, like the development of the cryptocurrency world itself, will occur on the basis of internal decentralized mechanisms. And what is very important is that institutional investors will again and again resort and run away from cryptocurrency derivatives, which will create fluctuations in the market, but fundamentally, cryptocurrencies are going forward, gradually winning back the place that fiat is currently occupying.
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