On December 17th CME Group, the world’s largest exchange company, launched a bitcoin futures contract. CME is the second exchange to do so, following Cboe’s bitcoin futures launch about a week earlier.
The price of Bitcoin dropped after the futures launch, from nearly $20,000 earlier in the day to $18,576.53, according to the Wall Street Journal. There were predictions that the introduction of futures would spell the end of bitcoin’s super-high prices, because skeptics would now have a vehicle for betting against the cryptocurrency.
So what does the introduction of bitcoin futures mean for the overall crypto landscape, as well as for the value of bitcoin and other cryptocurrencies moving forward?
According to Tim McCourt, Managing Director of Equity Products at CME Group, the company decided to launch Bitcoin futures based on a number of converging factors, including interest from a diverse group of traders and the recent establishment of CMEs Bitcoin Reference Rate (BRR), which provides a reliable daily price market for bitcoin.
When it comes to institutional investment, one of the most important events in the development of a new asset class is the introduction of a reliable index. An index allows investors to track their performance against that of the overall market and, perhaps more importantly, provides a relatively clear picture of overall trends in the market, making possible the introduction of derivative products such as futures contracts. While we haven’t yet seen the emergence of a definitive cryptocurrency index, the BRR can play a similar role for the bitcoin market specifically, if not the cryptocurrency market in general.
As an example of how indexes affect investment, let’s consider the Goldman Sachs Commodities Index (GSCI), which was created in the early 1990s. Before the creation of the GSCI, commodities futures were generally traded by organizations with a business stake in the physical commodities themselves. The point was to protect your business model by hedging against the supply fluctuations inherent to agriculture, not to get rich on a rising market; Wall Street was a world away. After the introduction of the GSCI, however, institutional investors began to take a real interest in commodities trading, directing large amounts of capital into futures contracts and boosting prices.
Whenever institutional investors get involved with a new asset class, there are naturally more long than short positions. Sustained capital inflows create an upward trend in the price of the asset—a trend supported by the fact that far more people are betting in favor of rising prices than betting against them. These dynamics played a significant role in the increase in grain prices after the introduction of the GSCI, and a similar trend is possible for digital assets.
Of course, the case for cryptocurrency growth is complicated by the fact that several high-profile investors, such as Jamie Dimon of J.P. Morgan and Warren Buffett, have already taken skeptical positions toward the new asset class (though Dimon has backpedaled somewhat). However, these positions seem to be more of a reaction to the hype and speculation surrounding cryptocurrency markets than a judgement on the technology itself. In our opinion, it is the usefulness of the underlying blockchain technology that makes digital assets so valuable: they bring speed, security, and transparency to transactions in a way that is distinct from any other asset class. (Again, notice the parallels with the commodities market, where financial vehicles were built on top of underlying assets with real-world usefulness.) As the hype fades away, and institutional capital becomes a larger share of the cryptocurrency market, we hope that the conversation will focus less on get rich schemes and more on underlying market dynamics, where history is our greatest teacher. When this happens, familiar trends will emerge, institutional investors will indeed go long on blockchain—pushing up prices, though not necessarily “to the moon”—and the financial system will start to reap the benefits of a new class of asset accepted on its merits as a vehicle for wealth, not its ability to make millionaires overnight.