This type of product is appealing because, at a time of historically low volatility, instruments that have the potential to move quickly are likely to be well-received by a trading community starved of high-beta opportunities. Traders make money when markets are volatile and struggle to do so when they are not.
Others are taking a more proactive approach to bitcoin and other digital currencies. It was reported in early October, for example, that Goldman Sachs was exploring the possibility of trading bitcoin. And in late October, the operator of the world’s biggest futures exchange, CME Group, appeared to give a vote of confidence in the cryptocurrency by announcing its planned launch of futures contracts on bitcoin.
So, are bitcoin futures just another punt on trading exotica, or are they a sign that one of the most systemically significant financial institutions in the U.S. is making a bold bet on the future of cryptocurrency?
Cash-settled futures involve the issuance of a final debit or credit to a customer when the contract expires, with the amount determined by the level at which the trader’s speculation on the future price of the underlying asset ended up at contract expiry.
And we have been stuck in a period of low volatility for some time now: The Chicago Board Options Exchange’s VIX index — or “fear index” — is reading 9.8, well below its long-term average of 20. The latest quarter’s bank earnings show how low volatility continues to crimp the trading business. BNP Paribas was the latest last week to blame “unfavorable” market conditions for a sharp fall in revenues. In such an environment, the recent wild swings in bitcoin’s value mean that bitcoin is effectively the only volatility play in town.
Bitcoin has certainly been volatile in its short life as a traded instrument. But even without CME offering futures contracts, there’s evidence it is being taken seriously by traders as an asset class in its own right. Bitcoin is the largest convertible virtual currency by market capitalization — worth close to US$72 billion as of August 2017 (pdf), according to the Commodity Futures Trading Commission (CFTC), the U.S. futures regulator that also oversees CME Group.
In addition, CME doubtless has an eye on the high-frequency traders who provide so much of the volume of global futures exchanges these days. This breed — made famous by Michael Lewis in his book Flash Boys — make money by exploiting tiny pricing differentials in split-second computer dealing.
Many of the institutions that facilitate the movement of capital around the world and manage investments have cast a jaundiced eye on bitcoin. Jamie Dimon, chief executive of JPMorgan Chase, this month dismissed it as a “fraud,” while Larry Fink, head of BlackRock, said the cryptocurrency’s rise “just shows you how much demand for money laundering there is in the world.”
The financial establishment doesn’t know quite what to make of bitcoin, the digital cryptocurrency (pdf) whose value has soared by 600 percent this year alone.
One of the largest commodity exchanges has started offering futures contracts on the cryptocurrency.
This is a much more subversive and difficult attack. I think it’s failing now, I think at this point it’s becoming more and more irrelevant. But last year it was scary, for the past year. SegWit2x, yeah, that was a big attack. I remember when it came, I remember immediately giving Barry Silbert shit on Twitter. He took a little Twitter break after. Just engaging with everybody I could. There’s a series you can find of me where I did 50 different tweets to every single person that signed it, asking them why they signed it.
Peter McCormack: Yeah, I was almost losing interest in it. And when it actually happened, I was asked about it, and I was like I don’t really know much about it because I’ve just lost interest in it. But as it heads towards irrelevance, and there will come a time when the likes of Ray and Roger will have to give up on it, people have asked about and said about Roger coming back to Bitcoin and will he be welcomed back?
All this already happened years ago, in 2013, 2014. We already had an ICO craze, that happened before, I saw it already. That’s why I knew how this one would turn out. And it will happen again. I don’t know for sure what the flavour will be, but it’s just an iteration. Every cycle, all the scammers iterate on what the scammers did before. And they do this to exploit the ignorance of new money.
Peter McCormack: Yeah. I heard an interview with him with Laura Shin where he talked about … he just wanted to break the deadlock, and he felt like he was somebody who could broker that. And it was said, I didn’t 100% believe him, but I didn’t 100% disbelieve him. I kind of didn’t know or want to think.
There’s plenty of disagreement, there’s plenty of centralised aspects. It’s not just people working on that code. And to point at them as if they’re an organisation that won’t cooperate and fix this problem, it was all imaginary in the first place. Luke Junior, he argues that the block should be smaller. It’s not a crazy argument, there is a reason for it. And so for me, the obvious thing was just that they wanted to fork it, and there was no consensus. That should have been the end of it.
Note: the following is a transcription of my interview with John Carvalho from Bitrefill. I use Rev.com from translations and they remove ums, errs and half sentences. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
John Carvalho: I don’t know. Sort of. I would say Ethereum people don’t seem to be that interested in attacking Bitcoin too much, but anything that is cryptocurrency or blockchain always has to, they have no choice, they have to paint themselves in the light of Bitcoin. They have to refer to themselves and say this makes them like stablecoins. They wouldn’t be called stablecoins if it wasn’t referring to Bitcoin’s volatility. It would be called Dollar coins, or Gemini coins. Do you know what I mean? They wouldn’t really call it stablecoins.
Peter McCormack: You come in with an argument, you kind of have to find it yourself. And the second turning point for me was … I’ve not said about this before, but I kind of had this idea for a book at one point. Doing all these interviews, I kind of had an idea for doing this book, which I don’t know if I’ll ever do because I don’t think I’m a writer, but in doing so I did a lot of research into the history of Bitcoin, the chronology. And I went through all the email threads from the S2X mailing list. And what happened was I was going through them, and it’s quite interesting, it’s almost like a who’s who of Bitcoin. All these people, these names that you see discussing.
John Carvalho: For me, it’s kind of in line with what I was just saying, I think. I definitely understand this because I’m always trying to educate new people coming in. And it’s hard to tell what works, and it really depends on why they’re here. The past wave really brought a lot of people that wanted to speculate on all kinds, so it became much more talking about how you have to associate this with gambling and be honest with yourself about what you’re trying to do. And you have to understand that you’re not just going to get rich quick. That this is all luck, that it’s not skill for the most part.
Defending Bitcoin with John Carvalho @ whatbitcoindid Peter McCormack Audio interview transcription — WBD064 Note: the following is a transcription of my