Bitcoin In 2018: Can Futures, Mainstream Investors Tame The Hysteria? Bitcoin began 2017 trading under $1,000. Then it got much bigger. Investors big and small arrived, sometimes bailed hard — as they did on Friday — then arrived some more.
Concerns were raised that Bitcoin barely qualified as money. Concerns were raised that its immense transaction volumes were swallowing up the world’s energy. Comparisons to Dutch tulip mania piled up, and a securities regulator in December said
“We’ve seen mortgages being taken out to buy Bitcoin.” Which all leads to one question for 2018: Is there any chance Bitcoin’s jagged, face-melting run for the stratosphere might become a bit tamer? The advent of Bitcoin futures from Cboe (CBOE), CME Group (CME) and, eventually, Nasdaq (NDAQ), has the potential to reel Bitcoin back into orbit.
A Bitcoin ETF in 2018? Certainly not impossible. Greater attention from regulators could help inform investors and stamp out fraud. After a week of some moderation on spot market, volatility has roared back in recent days.
Shares of Bitcoin-related stocks like Riot Blockchain (RIOT), Marathon Patent Group (MARA) and Bitcoin Investment Trust (GBTC) are also seeing big daily moves, while companies looking to rebrand themselves with blockchain such as Long Island Iced Tea (LTEA) and Net Element (NETE) keep jumping in.
And other cryptocurrencies, especially Ethereum and Litecoin, have shot up in price recently. But most big banks are unlikely, for now, to gorge on the tulips, and it’s still debatable whether treating Bitcoin like a normal investment will make it behave like one.
Others wonder if investors are prepared for the more complicated world of investing next year that the futures will bring — to a market where 40% of all Bitcoins are reportedly in the possession of 1,000 holders who could, on a whim, lop thousands of dollars off its price.
“So, someone who put in $10,000 now has $2 million in his account — does he know how to protect it when trading might go against him?” said Ihor Dusaniwsky, a managing director at financial analytics firm S3 Partners.
A Bitcoin Price Ceiling?
Those questions were perhaps underscored on Friday, when Bitcoin’s price crumbled below $12,000, then picked up another $1,000 later in the day, after a week of warnings from financial officials abroad and worries about possible insider trading. Bitcoin futures contracts from Cboe and CME were tracking close to the price of Bitcoin itself.
Futures contracts will allow investors to wager on whether Bitcoin’s price will rise or fall without owning the cryptocurrency directly. If more investors, possibly anticipating a bubble, use the futures to bet on a drop in Bitcoin, that might help tap the brakes on cryptocurrency’s feverish price increases, the reasoning goes.
That short-selling would also allow investors to hedge against their long bets on Bitcoin and make plays in the market more easily.
“So if I bought Bitcoin at $200, and it’s trading at $15,000, I might want to hedge out some of that without actually selling my Bitcoin,” Dusaniwsky said. “And this might be much easier with futures, to get in and out of that position intraday.” The contracts would also have trading and price limits, and could open a pathway for a Bitcoin exchange-traded fund that would trade on the stock market — a development Dusaniwsky said was likely in 2018. Cboe this filed with the SEC to list six Bitcoin ETFs. The more securities available overall, the more opportunity to short. Intercontinental Exchange (ICE), the company that owns the New York Stock Exchange, also wants to offer a Bitcoin ETF.
The massive retail brokerage TD Ameritrade (AMTD) said this month that it will let some clients trade Cboe’s Bitcoin futures, and rival E-Trade Financial (ETFC) followed days later. Also this month, Interactive Brokers (IBKR) said it would allow customers to make some bets against those futures.
Last week, there were some indications that short-sellers may have moved in and tempered the markets. Bloomberg reported at that time that the price of Cboe’s Bitcoin futures, which cost up to 13% more than Bitcoin itself, had over a few days drifted much closer to the spot price of the cryptocurrency.
But not everyone is convinced that Bitcoin futures will mellow out cryptocurrency markets.
“While the futures markets help bring traditional financial institutions into the space, they do encourage speculation rather than owning the underlying asset and are unlikely to dampen volatility,” Lex Sokolin, global director of fintech strategy at Autonomous Research, said in an email, noting that a Bitcoin ETF or mutual fund would instead be more helpful in easing volatility.
Any short-sellers would also be betting against a cryptocurrency whose price has ballooned more than 1,300% since the beginning of 2017.
While short-selling seems likely, there might not be as much of it as many are anticipating. “Number 1, short-sellers aren’t gluttons for punishment,” Dusaniwsky said. “With Bitcoin going up $1,000 a day some days, I don’t see these guys jumping into the short side, just doing outright short positions, on a whim.”
Institutional Investors Eye Bitcoin
Financial institutions might be fine with letting their customers make futures trades, but the big banks are largely staying away from doing it themselves. But Goldman Sachs (GS) is setting up a trading desk for cryptocurrencies and hopes to have it running by the end of June, sources told Bloomberg Thursday. That would make Goldman the first of Wall Street’s top trading firms to jump into the crypto-mania.
Peers like Citigroup (C) and Bank of America (BAC) are waiting to see what what happens. Bitcoin futures are too new and too small, with too little regulatory underpinning, for the banks to get into right now, said CFRA analyst Ken Leon before the Goldman news broke.
The volatile cryptocurrency isn’t exactly fodder for banks’ wealth management divisions, either. Banks, who have tried to detox from the high-risk investments that battered them during the financial crisis, would also have to calculate the potential loss risk of any asset tied to Bitcoin.
“I wouldn’t expect to see JPMorgan (JPM) involved anytime soon,” said Clyde Tinnen, a corporate-finance partner at the law firm Withers Bergman, which advises clients on cryptocurrency markets. But hedge funds are getting in the game.
Fortress Investment Group and Horizon Kinetics have purchased Bitcoin recently, while executives from firms like Quantbot Technologies and Steven Cohen’s Cubist Systematic Strategies recently met to discuss how they could profit from cryptocurrencies, according to the Wall Street Journal.
Crytpocurrencies vs. Crypto-Hype
Still, as Bitcoin’s price has scorched higher, and as startup entrepreneurs attach the “crypto” prefix to whatever’s trending, the Securities and Exchange Commission has started to notice. The agency in December stopped at least two initial coin offerings — a form of digital fundraising — that it deemed suspicious or in violation of securities laws.
The SEC has also issued advice to investors to avoid getting conned, and even urged caution when considering celebrities’ promotions of things like ICOs — an announcement that came after Floyd Mayweather, Jr., Paris Hilton and a few others have thrown their support behind them.
“Any celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion,” the agency warned in November, later adding that those celebrity endorsers “often do not have sufficient expertise to ensure … compliance with federal securities laws.” But as Bitcoin exchanges strain under the weight of more interest and more serious money, disputes among developers over how best to speed transactions through the network seem likely to resurface in 2018.
Disagreement over how to proceed has led two “fork” currencies that have formed out of Bitcoin: Bitcoin Cash, in August, and Bitcoin Gold, in October. Those cryptocurrencies use different algorithms and equipment and have different sizes of the blocks of code that store transaction information.
As that debate goes on, or as Bitcoin’s price drifts out of reach, investors could turn their attention to lower-profile, lower-drama currencies such as Bitcoin Cash, Ripple, Ethereum, Litecoin and others. “Some of them could even gain advantage in the future by offering better compliance with regulatory requirements,” JPMorgan analysts said in a research note in December.
‘Bubble To End All Bubbles’
As more people have piled into Bitcoin, the doubt from bigger names in the financial world has built up on a daily basis.
Most recently, Fed Chair Janet Yellen said Bitcoin’s presence in the payments landscape was still very small.
But she said, as others have, that it was “not a stable store of value” and “highly speculative.” UBS’ global chief economist called Bitcoin the “bubble to end all bubbles”.
Brian Armstrong, the co-counder and CEO of the cryptocurrency exchange Coinbase, said in a December blog post: “Please invest responsibly.”
“Most of the investors that I talk to, they look at Bitcoin truly as a commodity,” Tinnen said, adding that they tend to guard against the cryptocurrency’s occasional stabs downward with defensive investments elsewhere.
“I have to say that they are very enthusiastic, and sometimes that enthusiasm means that they are not always taking as clear-eyed a view as they should in order to hedge it.” Others, Dusaniwsky said, might not be the kind of traders you typically see on the stock market.
They might not be familiar with the investment vehicles that are coming into the market. They might not know how to use, say, stop-loss orders, he said, or otherwise trade their positions more professionally, if the up-market this year heads south.
“You’ve got a lot of sheep that are long Bitcoin,” he said, “and the wolves might be starting to get into the market.”