CME launching bitcoin futures in 2017 to give digital currency big push toward legitimacy
CME is the world’s biggest derivatives exchange operator
CME Group Inc, the world’s largest derivatives exchange operator, said on Tuesday it will launch a futures contract for bitcoin later this year, marking a major step in the digital currency’s path toward legitimacy and helping propel it to a fresh record high.
The new contract will be settled in cash, based on the CME CF Bitcoin Reference Rate (BRR), a once-a-day reference rate of the US dollar price of bitcoin. Bitcoin futures will be listed on the CME, as it races with rival CBOE Holdings Inc to become the first traditional financial marketplace to offer trading related to the notoriously volatile instrument.
“This is going to help tremendously with institutional support as well,” said John O’Rourke, president and director of Riot Blockchain Inc in Colorado, a Nasdaq-listed company focused on bitcoin and blockchain technology. “That may help manage the volatility. I know that some institutionals see that as a hiccup.”
Bitcoin jumped to an all-time high above US$6,400 on the BitStamp exchange after the CME news. It was last at US$6,358.85, up nearly 4 per cent, and has shot up more than six-fold this year.
The massive bitcoin rally has created a divide on Wall Street about whether it is a legitimate financial instrument and whether the industry’s heavyweights ought to have a hand in trading or making markets in it. Some crypto-currency exchanges have been hit by fraud and deception.
Indeed, CME President Bryan Durkin said in September that he did not think the group would move forward in the near term with a bitcoin futures contract. But apparently demand for a contract was too strong to ignore.
“Given increasing client interest in the evolving crypto-currency markets, we have decided to introduce a bitcoin futures contract,” Terry Duffy, CME group chairman and chief executive officer, said in a statement announcing the contract’s launch.
Many large financial institutions support the use of blockchain, the technology underlying crypto-currencies, to improve back office processes. Yet some bankers oppose doing business with actual crypto-currencies that are not backed by national governments and have been involved in scandals.
In September, JP Morgan Chase & Co Chief Executive Jamie Dimon called bitcoin a fraud and said he would fire any traders at his bank who touched bitcoin. Meanwhile the CEOs of Goldman Sachs and Morgan Stanley said the crypto-currency could be worth considering.
Others like CME see crypto-currencies as a business opportunity. Rival exchange group CBOE has applied with US regulators to launch a bitcoin futures contract and a bitcoin exchange traded fund on its venues.
“There are lot of people who want to participate in bitcoins and the blockchain technology so it should be well-received,” said Greg Adamsick, director of global futures and options at RCM Alternatives in Chicago. “This should make it more comfortable for people to hold (bitcoin).”
Still, simply launching a futures contract does not guarantee it will ever get traction. The list of failed contracts offered by US futures exchanges includes apples, potatoes, shrimp, and turkey futures, as well as contracts tied to inflation, and futures contracts tied to specific stocks.
Since November last year, CME Group and UK-based bitcoin futures exchange Crypto Facilities Ltd have calculated and published the BRR, which consolidates the trade flow of major bitcoin spot exchanges during a calculation window into the US dollar price of one bitcoin as of 4:00pm London time.
Crypto-currency exchanges Bitstamp, GDAX, itBit and Kraken currently contribute prices for calculating the BRR.