Bitcoin has taken a step toward legitimacy with the launch of a product on a Chicago exchange that allows investors to take bets on its price in the future.
The new contract on the Chicago Board Options Exchange came as the digital currency jumped another 10%, sparking fresh warnings of a speculative bubble after last week’s 40% climb in price.
Bitcoin was trading at $16,200 – up 10% on the day – while the new futures contract trading in Chicago showed that traders were expecting the cryptocurrency to be trading at even higher prices in January.
The futures contract trading on the CBOE allows traders to take bets – or to protect themselves – on the price of bitcoin next month. It started trading just before midnight (in London) on Sunday at $15,460, hit a high of $18,700 and then dropped back to $17,800.
Such was the price volatility when the contract launched that trading had to be halted twice through so-called circuit breakers and the CBOE had to admit that its website was creaking because of the heavy traffic although its trading platform kept working.
Due to heavy traffic on our website, visitors to https://t.co/jb3O722hoo may find that it is performing slower than usual and may at times be temporarily unavailable. All trading systems are operating normally.
— Cboe (@CBOE) December 10, 2017
The launch of the contract on a regulated exchange is regarded as a sign that bitcoin is becoming more mainstream rather than currency associated with technology experts and even criminals.
Daniele Bianchi, assistant professor of finance at Warwick Business School, said: “Although it has been thought of as a peer-to-peer payment system, it is evident that bitcoin is gaining more and more legitimacy as an asset class. Today’s launch of bitcoin futures has the potential to add further momentum and thus increase the appeal of the cryptocurrency to both institutional and retail investors.”
Volume in the futures contract was low: according to calculations by Breakingviews, it was roughly $50m (£37m), less than 0.5% of actual bitcoins.
Bitcoin – created in the aftermath of the financial crisis as a way to avoid using banks – started the year trading at $966 and its meteoric rise this year has led to comparisons with the dotcom bubble in 2000 and the 17th century tulip bubble.
Bitcoin is a 'cryptocurrency' – a decentralised tradeable digital asset. Invented in 2008, you store your bitcoins in a digital wallet, and transactions are stored in a public ledger known as the bitcoin blockchain, which prevents the digital currency being double-spent.
Cryptocurrencies can be used to send transactions between two parties via the use of private and public keys. These transfers can be done with minimal processing cost, allowing users to avoid the fees charged by traditional financial institutions - as well as the oversight and regulation that entails. The lack of any central authority oversight is one of the attractions.
This means it has attracted a range of backers, from libertarian monetarists who enjoy the idea of a currency with no inflation and no central bank, to drug dealers who like the fact that it is hard (but not impossible) to trace a bitcoin transaction back to a physical person.
The exchange rate has been volatile, with some deeming it a risky investment. In January 2021 the UK's Financial Conduct Authority warned consumers they should be prepared to lose all their money if they invest in schemes promising high returns from digital currencies such as bitcoin.
In practice it has been far more important for the dark economy than it has for most legitimate uses. In November 2021 it hit a record high of more than $68,000, as a growing number of investors backed it as an alternative to other assets during the Covid crisis.
Bitcoin has been criticised for the vast energy reserves and associated carbon footprint of the system. New bitcoins are created by “mining” coins, which is done by using computers to carry out complex calculations. The more bitcoins that have been "mined", the longer it takes to mine new coin, and the more electricity is used in the process.
One of a number of cryptocurrencies, bitcoin is not regulated and is controlled by a network of computers that update all transactions which take place on a variety of trading platforms around the world. It only exists digitally and is “mined” using mathematical equations.
But on Monday, a top central banker said the European Union should look at the possibility of regulating bitcoin because of the risk of money laundering. Speaking in Vienna, Ewald Nowotny, said: “Simply because of the scale, it is certainly increasingly necessary to discuss whether and in what form regulations are needed here.”
Nowotny, Austria’s central bank governor and also involved in setting interest rates at the European Central Bank, added: “A particular aspect that needs to be discussed ... is the question of how far the regulations on money laundering ... are relevant here.”
His remarks come after warnings from other senior bankers about the risks associated with bitcoin. Last week, Howard Davies, chairman of Royal Bank of Scotland, had said the sign should be put up from Dante’s Inferno – “Abandon hope all ye who enter here” – while Jamie Dimon, the head of JP Morgan, has talked about bitcoin as being worse than tulip mania and potentially used by “a drug dealer, a murderer, stuff like that”.
The latest surge of excitement in the world of cryptocurrencies came over the weekend when the Chicago Board Options Exchange launched futures trading for bitcoin for the first time.
Futures contracts allow investors to agree to buy a certain amount of a commodity, bond or share at a specific price at a designated time in the future, hence the name. It means investors can bet on whether they believe a particular commodity – in this case bitcoin – will rise or fall by a specified future date. They are generally used in commodity markets to hedge against major fluctuations in prices, such as unexpected weather conditions hitting crops. But they are also well established in equity markets, with trading on individual companies and indices such as the FTSE 100 and S&P 500.
There are risks, mainly when investors use debt to finance their futures speculation and their bet goes the wrong way.
As the new futures contract was launched, analysts at Swiss bank UBS said “cryptocurrencies are a bubble”. Paul Donovan, global chief economist at the Swiss bank’s asset management arm, said futures on tulip bubbles were launched in 1636. The tulip bubble did not burst until February 1637.
“Bubbles are by definition irrational,” said Donovan. “Predicting when a bubble will burst cannot use rational analysis. Ignoring a bubble is the best course of action.” About 16m bitcoins have been mined so far but there will only be 21m in total because it is written into the currency at its source code. Another futures contract on another US exchange is due to launch next week.
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