With the last CBOE Bitcoin futures set to expire in June, it looks like institutional interest in cryptocurrency is fading. It wasn’t long ago that there seemed to be an unstoppable wave of institutional interest heading toward the shores of crypto.
So what happened?
If you take a step back in time, you may faintly recollect the heady days approaching the original listing of futures hosted by the CME and the CBOE. It was December 2017 and bitcoin, along with the rest of the crypto market, was approaching all-time highs. Hodlers were celebrating their wise decisions, and persuading family and friends to join in the buying frenzy.
And then came the Shorts
Futures contracts began forecasting a precipitous fall in prices, creating a negative feedback loop between spot markets and futures trading. Bitcoin prices fell rapidly and the price continuously plummeted over the following year, with only an occasional bounce or bout of volatility.
Often these were conveniently timed around future contract expirations.
The Problem With Cash
There was a big problem with these futures: they were cash-settled.
This is important for one key reason: a trader could be holding a large quantity of bitcoins while simultaneously betting against BTC on cash-settled futures. At an opportune time, the trader could then liquidate their bitcoins, causing a plunge in prices.
So cash-settled futures aren’t really a great way to encourage growth in a new asset class. They have, however, been excellent for suppressing prices.
Physically settled futures, on the other hand, would not be as susceptible to the same negative influence. In these contracts, the asset would be held in a sort of escrow until the completion of the contract, when it would be paid out.
This differs from cash settlements which are more like side-bets on the underlying asset. Unlike cash-settled futures, physically-settled futures would create a demand on the BTC supply.
And now, the CBOE is saying goodbye to cash-settled futures, leaving the CME as the only available institutional venue for these trades. Mainstream media is painting this as a somewhat pathetic adieu to the once emerging, but now failed fad that is the cryptocurrency market. A tulip bubble, now popped out of significance.
Let’s Get Physical (….ly Delivered Futures Contracts)
Given the latest goodbyes, you might be puzzled to learn that the CBOE is still fully committed to the Bitcoin game.
The CBOE, it turns out, is a major investing partner of ErisX, along with market giants like Fidelity, TD Ameritrade, and NASDAQ. ErisX currently offers spot trading, but is in the process of establishing physically settled futures trading, following regulatory approval.
One major barrier that has consistently held back approval of such exchanges is the lack of competition, low liquidity, and the resultant high susceptibility to manipulation. By allowing a number of institutional options for investors, this barrier may finally evaporate.
Both Bakkt and LedgerX will soon join the physically-settled futures party, offering healthy competition in the nascent market. This is crucial for regulatory approval, providing the “healthy competition” needed in order to comply with antitrust laws and to quell manipulation concerns.
Maybe the institutional buyers have been playing this game all along?
These corporate forces play the long game a whole lot better than retail investors. In order to fully prepare for such a large-scale launch, these entities would need to accumulate bitcoin over a long period of time.
It’s hard to read the minds of financial institutions. But cynical traders might wonder if big players are already accumulating bitcoin through over-the-counter trades, while taking advantage of the downwards pressure in futures prices.
Institutional traders, when they do arrive in force, are unlikely to “play nice” with the casual crowd. They are here to make serious money and will take whatever time is needed to properly set the table. They have far more patience and a much longer term vision than the average retail trader buying $50 of bitcoin on Coinbase.
By all signs, the institutions are coming. But when they finally join the game, it will be on their own terms.