CBOE bitcoin futures now live. Here’s why it means nothing

Andrew Munro

Posted: 11 December 2017 11:13 am News

Nothing to see here.

The world's largest options exchange, the Chicago Board Options Exchange (CBOE) has just launched bitcoin futures trading, at 6pm Sunday New York time (10am Monday Sydney time).

It will be followed by the Chicago Mercantile Exchange Group (CME) on 17 December.

It's been a widely hyped move, with rampant speculation about how it might affect the price of bitcoin. But despite the hype, it probably won't move the needle in any discernible way.

Enthusiasts say:

• That this gives bitcoin more legitimacy on Wall Street
• That it's a brand new way of investing and speculating in bitcoin
• That the influx of money will change things
• It allows for more regulatory input

They're almost certainly overestimating the impact on all counts.

It's a matter of legitimacy

Bitcoin futures trading most likely came to CBOE by popular demand, so any sense of legitimacy was already there.

Plus, in the long run it might even be a step backwards. This move takes bitcoin further away from its future as a currency, and instead treats it as a lucrative and entertainingly unpredictable new toy on Wall Street.

It's already old news

Anyone who wanted to trade bitcoin futures already could. For months now forex trading platforms have let their users leverage and go long and short on bitcoin (and Ripple, Litecoin, Bitcoin Cash, Monero, Dash and a whole lot more) against USD, EUR and others.

CBOE is very late to the party, and it's bringing a fairly limited and uninspired offering to it.

It's so late, in fact, that in some respects the party's winding down. Some of the platforms that have previously offered bitcoin futures trading were forced to turn away new customers in order to manage their exposure.

Which leads to the third point...

Not enough money to matter

Bitcoin futures trading isn't for just anyone. Not anymore at least.

It's typical for futures trading platforms to have their own exposure risk management guidelines. Essentially they'll only work with a certain amount of money with different assets. This prevents them from going entirely belly-up in the event of a market crash. This is often determined by a formula comprised of acceptable risk, asset volatility and similar.

The high price, high volatility and high demand for options trading means those limits are reached fast. At this point, platforms will typically start turning away new customers.

Some of the earlier adopters have already been through here, introducing bitcoin futures trading for a while, and then closing the doors to new customers in order to limit exposure. In order to keep the risk under control, it's safe to say that only select customers will be let in.

In some ways, this just further centralises the already-concentrated money behind bitcoin.

What regulation?

Despite their size, CBOE and CME aren't the only names on Wall Street.

An open letter from the Futures Industry Association (FIA) which represents names including Goldman Sachs, Morgan Stanley, JPMorgan and Citigroup, has pointed out that CBOE and CME are offering bitcoin futures product under an agreement to self-regulate, and that "these novel products does not align with the potential risks that underlie their trading."

The Commodity Futures Trading Commission (CFTC) has also warned that cryptocurrency markets are largely unregulated and that the agency has limited statutory authority.

Without a working regulatory body, it's probably safe to assume that there's going to be some price manipulation going on, and it's been speculated that the introduction of more bitcoin futures trading is going to put some fingers on the price scale.

However, cryptocurrency exchanges have long struggled with this. "Pump groups," where users pool their resources to manipulate the market, are a longstanding feature. Meanwhile some of the wealthiest bitcoin owners are almost certainly bypassing exchanges entirely, buying and selling behind the scenes to avoid (un)duly impacting the markets.

If the introduction of CBOE bitcoin futures trading does have a price impact, it will probably just be in the form of price increases from another cash injection. But for obvious reasons, a bitcoin price increase will be difficult to attribute to CBOE.