CME Group, the world’s largest exchange operator by market value, is readying plans to offer futures on bitcoin, giving momentum to cryptocurrencies’ move away from the fringes of finance.
The Chicago-based trading venue said it intended to add bitcoin to its stable of futures on interest rates, stock indices, commodities and currencies by the end of the year.
Bitcoin, the biggest of the cryptocurrencies, is controlled by computer algorithms rather than central banks, unlike mainstream currencies. Advocates applaud its traceability while critics say it is an avenue for money laundering and fraud.
The price of bitcoin has exploded by 570 per cent this year, luring traders bored by the lack of volatility across other markets. Hedge funds, family investment offices and proprietary trading companies are dipping their toes into cryptocurrency markets now worth more than $170bn, while banks and traditional asset managers have mostly steered clear.
A lack of futures contracts has made it difficult to hedge exposure to bitcoin’s wild fluctuations. Terry Duffy, CME chief executive, said the exchange made its move “given increasing client interest in the evolving cryptocurrency markets”. His exchange was a “natural home” for the vehicle.
The gambit puts CME in competition with Chicago-based exchange operator Cboe Global Markets, which in August announced plans to launch derivatives on bitcoin based on data from virtual currency exchange Gemini Trust in late 2017 or early 2018.
“The business case for us is the desire for exposure to crypto, period,” Ed Tilly, Cboe chief executive, said at a conference in October.
Both CME’s and Cboe’s contracts require approval from the US Commodity Futures Trading Commission. A third company, LedgerX, opened a bitcoin derivatives venue two weeks ago, reporting more than $1m in trades in its first week.
The CFTC declared bitcoin and other virtual currencies a “commodity” in 2015, enabling it to police futures contracts based on them. The agency recently warned that unregistered cash bitcoin markets are susceptible to “bucket shop” schemes, “Ponzi schemers” and “fraudsters seeking to capitalise on the current attention focused on virtual currencies”.
Jamie Dimon, the JPMorgan Chase chief executive, last month called bitcoin a “fraud” that is used mostly by murderers, drug dealers and other miscreants. Larry Fink, head of BlackRock, the world’s biggest asset manager, said bitcoin was an “index of money laundering”.
The warnings have not dissuaded traders. Garrett See, chief executive of DV Chain, a Chicago-based trader, said CME’s announcement showed that “cryptocurrencies are gaining more legitimacy in the financial marketplace. It’s really exciting. I think it’s going to bring a lot of liquidity.”
Bobby Cho, head of OTC trading at Chicago-based Cumberland — the leading cryptocurrencies market maker — said the announcement “potentially accelerates the pace of involvement of more traditional financial firms. Many already have connections into exchanges like CME, and this is just another product they can plug into.”
Most new futures contracts fail for lack of volume. CME has in the past succeeded in introducing novel products, however, including interest rate and currency futures. Last year the notional value of its transactions topped $1,000tn.
The new CME Group contract would be cash-settled, based on the CME CF bitcoin Reference Rate, a once-a-day index based on prices at the Bitstamp, GDAX, itBit and Kraken bitcoin exchanges.