Bitcoin, the red-hot digital currency that recently skyrocketed past the $10,000 per unit barrier, will enter a brave new universe later this month when two of the world’s largest futures exchanges — the Chicago-based CME Group and the Chicago Board Options Exchange — plan to roll out the first bitcoin futures contracts.
Starting Dec. 18, traders around the world will be able to exchange bitcoin through the CME Group at a specified price at an agreed-upon date in the future, just as speculators have for many decades placed bets on the future price of foreign currency, energy, agricultural products and metals on the exchange.
“Given increasing client interest in the evolving cryptocurrency markets, we have decided to introduce a bitcoin futures contract," said Terry Duffy, CME Group chairman and CEO, in a statement.
CME Group’s chief competitor, CBOE Futures Exchange, also announced it has filed a product certification with the Commodity Futures Trading Commission to offer its own bitcoin futures trading. It, too, hopes to be underway by the end of the year.
With bitcoin’s arrival on the futures market, many large investors who may not want to buy large quantities directly will have the option of trading on the up and down values of the cryptocurrency through a well-established exchange.
Futures contracts are a type of forward contract between a buyer and a seller of an asset. They agree to exchange goods and money at a future date, but at a price and quantity determined today.
For instance, a major food processor would use futures contracts to hedge its risk on the price of corn. The company would buy corn futures that would rise in value to offset the higher price it might need to pay for corn at a future date if the price goes up.
Speculators in the futures market simply make bets on whether the price of a commodity or currency will be higher or lower at a future date.
Timing is everything when it comes to bitcoin.
A single bitcoin today is worth about $11,300. The currency’s price has risen more than 600 percent this year. But during that time, it also has dropped by double-digit percentages.
John Sedunov, an assistant professor of finance at Villanova University, is working on a research paper that examines whether bitcoin can become mainstream enough to replace traditional banking. He said trading bitcoin on futures exchanges will likely reduce the price volatility.
“If the price is less volatile, it will be easier for retailers to accept bitcoin, and that should aid the overall acceptance of bitcoin as a currency,” Mr. Sedunov said. “With volatility being the way it is, it’s hard for retailers to accept bitcoin without immediately converting it to cash.”
Major companies that accept bitcoin include Dell, Expedia, Paypal and Microsoft. While Amazon.com does not accept bitcoin directly for product purchases, buyers can use a bitcoin wallet to buy an Amazon gift card. Some companies that accept bitcoin, such as Overstock, will convert bitcoin revenue back into U.S. dollars via Coinbase.
Bill Mahnic said he has purchased long-term call options on CME Group in a bet that the value of the publicly traded company will increase due to the demand for bitcoin.
“I think this will be better for CME Group than it will be for bitcoin,” said Mr. Mahnic, an associate professor at Case Western Reserve University in Cleveland. “CME will make a lot more money on the trading of bitcoin than the people who actually own it.”
Tim Grant: tgrant@post-gazette.com or 412-263-1591.
First Published: December 5, 2017, 11:45 a.m.
