Bitcoin exchange-traded funds could be within sight now that Cboe Global Markets Inc. and CME Group Inc. have launched bitcoin futures trading.
The new products are the first to be condoned by U.S. regulators in the mostly unregulated cryptocurrency economy. While derivatives such as futures contracts are mostly used by professional traders and institutions, they are also a step toward creating passive investing strategies and ETFs — the investment products that have come to dominate equity markets and retail investors' portfolios.
The ease of trading ETFs on stock exchanges could give more investors exposure to the volatile cryptocurrency and raise bitcoin’s profile in the wider economy. Bitcoin has already captured headlines in the latter half of 2017, and the digital currency's value surged about 1,800% from Jan. 2 to Dec. 17.
The futures products have added a "new level of professionalism" to the continually expanding bitcoin market, said Cboe Chief Strategy Officer John Deters, who echoed fellow Cboe executives on the possibility of bitcoin ETFs in the future.
"We're likely in the not-so-distant future going to see [exchange-traded products] starting with ETPs based on the futures," Deters said in an interview.
Bitcoin futures are largely expected to gain traction with investors despite the cryptocurrency's volatility and opaque underlying markets, several industry experts said. That volatility was on full display in the days leading up to the Dec. 10 launch of Cboe's bitcoin futures product. Bitcoin's value climbed 46.0% before falling and leveling out around $15,000 at the time the product went live.
Cboe's and CME's bitcoin futures products may add some stability to the cryptocurrency's underlying markets, said James Angel, a finance professor at Georgetown University. When a futures contract is implemented for most commodities, volatility in the underlying asset will decline thanks to increased liquidity and market-making activity stabilizing the price, Angel said in an interview.
Months before Cboe launched its bitcoin futures, the company's Bats BZX Exchange Inc. pursued a bitcoin ETF. But the Securities and Exchange Commission shot down the proposal based on the lack of a regulated derivatives market for the cryptocurrency, among other reasons. An SEC spokesperson declined to comment on the possibility of a bitcoin ETF.
The bitcoin futures market provides the cryptocurrency space with a "more mature asset class," said Cboe's Deters, who added that regulators are likely evaluating the launches of Cboe's and CME's products to see how markets and trading are being monitored.
The U.S. Commodity Futures Trading Commission's actions will pave the way for the SEC to approve bitcoin ETFs, said Joseph Saluzzi, a co-founder and partner of broker/dealer Themis Trading LLC. Although he opposes the introduction of bitcoin futures, Saluzzi expects the SEC to approve ETFs in the first quarter of 2018.
Critics argue that bitcoin's underlying markets are too hazy for regulators and traders to fully understand what is included in a bitcoin futures contract. In an interview, Saluzzi called the products "dangerous" and warned that flash crashes or market manipulation could occur.
But the futures market regulatory agency has been monitoring cryptocurrencies since at least 2015, and it likely is aware of the risks associated with bitcoin and has mitigated them, Jeff Bandman, former head of the CFTC's Division of Clearing and Risk, said in an interview. A CFTC spokesperson declined to comment.
One cryptocurrency expert said that at some point, the danger of not regulating the cryptocurrency in some way becomes greater than the danger of permitting it in an unapproved form. Lex Sokolin, global director of fintech strategy at Autonomous Research, believes that point is coming in 2018.
While there may be "quite a lot" of distance to travel between the launch of bitcoin futures and bitcoin ETFs, the demand is there, he said.
"At the very least, this is an early test of, can these pieces be used as building blocks in manufacturing financial products that are then deployed elsewhere within other strategies," Sokolin said in an interview.
For the industry to work toward retail adoption, bitcoin needs to look and feel like it is "vanilla and uninteresting and boring," just another part of the whole, he said. As regulators monitor the progress of Cboe's and CME's bitcoin futures products, other exchange operators like Deutsche Börse AG and Nasdaq Inc. have expressed interest in launching similar products, a trend that could validate Wall Street's pickup of the cryptocurrency.
