Bitcoin futures and the future of bitcoin
by Bija Knowles
Bitcoin futures trading is here but the cryptocurrency remains a side-show for corporate treasury and won't be used in corporate payments any time soon – for six very good reasons.
CBOE and CME launch bitcoin futures trading
Following the launch of bitcoin futures trading on the CBOE (Chicago Board Options Exchange) at the end of last week, the CME (Chicago Mercantile Exchange) Group, one of the world's largest options and futures exchange, is also set to launch bitcoin futures next week, a move that is thought could lend bitcoin a “stamp of legitimacy”. From last Sunday, 10 December, investors trading on the CBOE have been able to bet on whether the value of bitcoin will rise or fall and, from next week, investors on the CME will be able to do the same.
It's an interesting bet considering that bitcoin is a hugely volatile currency. Recently its value surpassed $16,000 (as of 11 December 2017) but the value changes hour by hour and has risen astronomically this year, from just under $1,000 at the start of the year. At the start of 2015, one bitcoin was valued at just $300.
According to the CME Group, bitcoin futures will be based on the bitcoin reference rate, which is calculated once a day, based on the US-dollar value of bitcoin.
Keep bitcoin separate from real economy
The launch of bitcoin futures trading was criticised by Interactive Brokers chairman Thomas Peterffy – the so-called 'father of high speed trading'. Last month Peterffy went so far as to take out a full-page ad in the Wall Street Journal, warning Commodity Futures Trading Commission Chairman J. Christopher Giancarlo of the dangers of bitcoin. He objected to the clearing of bitcoin and other cryptocurrencies together with 'real currencies', arguing that the virtual currencies need to be kept separate from the 'real economy'. He told CNBC: “What I am objecting to is linking bitcoin and other cryptocurrencies by federal regulations to the real economy, which would happen if we were to clear bitcoin along with other products in the same trading house.” He said the move would be 'suicidal' and could bring down the entire economy.
But Interactive Brokers seems to have effected something of a u-turn on bitcoin and says it will now allow investors to make 'bearish' bets against, or short, bitcoin, on its trading platform – albeit at huge margin requirements for each contract of between $9,000 and $40,000.
Why bitcoin for payment 'sucks'
This is all very interesting but, as far as the relevance for corporate treasurers following the bitcoin story, there doesn't seem to be much probability of bitcoin actually being used as a payment method any time soon. Some of the most insightful comments on the evolution of bitcoin come from the FT Alphaville team. Yesterday, Alphaville editor Izabella Kaminska wrote: “As an actual payments mechanism, bitcoin sucks.” And she went on to make it fairly clear why using bitcoin as payment is just not practical, or even sensible: “It’s expensive to use and getting ever more so. It can be slow and unpredictable. It’s complicated and very user unfriendly (computer nerds will dispute this, but in doing so show how detached they are from the everyday needs of the average population). It depends on untested third parties for usability even more so than conventional electronic money. It’s prone to hacking. It demands users read Reddit all day every day to keep up with the latest exchange, transaction and wallet updates. It passes way too much responsibility to the average user (even the well-educated lose passwords). It sucks on the energy efficiency front. Its volatility makes it a crappy medium exchange. And finally, if not foremost, the more of a speculative asset it becomes the less useful it becomes as a currency.”
Six reasons why bitcoin won't be used for B2B payments any time soon
Some of the reasons why bitcoin/cryptocurrencies will remain just a side-show for corporates, for the time being, rather than becoming an accepted from of payment and trading, were summed up by the Reserve Bank of Australia governor, Philip Lowe:
- bitcoin is hugely volatile;
- the number of payments that can currently be handled is very low;
- there are governance problems;
- the transaction cost involved in making a payment with bitcoin is very high;
- enormous amounts of electricity are used in the process of mining bitcoins;
- bitcoin used widely as a payment could also affect financial stability and could make runs on banks more likely.
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