FUTURE EXCHANGE

Bitcoin began the year trading at under $1,000. By December, it had pulled a 20x and been listed on two of the world’s leading futures exchanges. It was a wild ride, culminating in the once-unthinkable happening when Cboe Futures Exchange launched the first Bitcoin futures contract for accredited U.S. investors.

The feat was remarkable not just on account of Bitcoin’s year-long rally, but due to the events it had weathered that threatened to split both its network and community apart. In August, the culmination of the Block Wars had seen SegWit implemented on Bitcoin and the opposing faction fork off to create their own chain in Bitcoin Cash. Bitcoin survived, but the in-fighting was less than ideal at a time when the world was watching – including a growing number of institutional investors.

Of course, it wasn’t just Bitcoin’s scaling wars that were keeping institutions on the sidelines: there was also the fact that the infrastructure and regulatory framework weren't sufficiently developed for them to jump in. Trading Bitcoin required engaging with a fragmented landscape of exchanges, many of which were unregulated and carried significant counterparty and operational risks. There was no secure and regulated vehicle for institutions to gain exposure to Bitcoin's price movements.

This institutional impasse created pent-up demand for a product that could bridge the gap between traditional finance and the new world of digital assets. The solution was simple: to create a futures market that would enable investors to trade Bitcoin without needing to custody the underlying asset. But implementing it from a legal and technical perspective was anything but. Which Wall Street giant would be brave enough to step up and accept the challenge?

One of the greatest obstacles to getting lawmakers onside with the idea of regulated Bitcoin futures, recalls then CFTC chair J. Christopher Giancarlo, “wasn’t political but generational. Older politicians and policymakers were quite hostile to the idea of a marketplace for crypto, believing it was an attack on the traditional financial system. Some complained that it legitimized crypto, but my view was that it’s not the role of policymakers to legitimize a lawful product.”

Notable opponents of Bitcoin futures include Thomas Peterffy, billionaire founder of Interactive Brokers, who was so concerned that he took out a full-page ad in the Wall Street Journal in November 2017. In an open letter to the CFTC Chairman, Peterffy warned that Bitcoin’s market was not mature or stable enough, and that unbridled futures speculation could “destabilize the real economy” if BTC derivatives weren’t walled off from other financial markets.

Bitcoin Goes TradFi

In the event, Bitcoin got not one but two futures products created by titans of the Chicago derivatives landscape. Cboe Global Markets and CME Group both entered the arena with the goal of being the first entity to launch a regulated Bitcoin futures contract. The game was on. Through the final quarter of 2017, the two firms worked tirelessly and diligently to build out their products. In the event, Cboe narrowly won the race to market – though its victory would prove short-lived.

On December 10, Cboe Futures Exchange launched Bitcoin futures with CME Group following just eight days later. Demand was so high that Cboe’s website crashed shortly after launch. Its front-month contract, expiring in January, opened at around $15,000 and surged so rapidly that it triggered two separate trading halts designed to cool volatility.

Bitcoin had started 2017 with zero institutional products and ended it with two – but as history would record, they launched at the market top. All year Bitcoin had been rising, but within days of Cboe and CME’s products launching, BTC began to unwind. So too did the fortunes of Cboe, whose Bitcoin futures never gained sustained traction and were wound down barely fifteen months after launch.

As for the narrative of institutional capital bringing stability to Bitcoin, that didn’t play out as planned either. Instead, the first wave of sophisticated capital used the tools at its disposal to bring about a long-overdue market correction. BTC’s peak coincided with the day Bitcoin futures began trading on CME. Its precipitous and sustained decline would last for the next year, erasing over 80% of its value and plunging the market into a prolonged winter. Institutional adoption, it transpired, was a two-edged sword.

Looking back now, however, J. Christopher Giancarlo remains adamant that “the launch did bring credibility to Bitcoin. Derivatives allow people to take both positive and negative views on price, which creates a true “two-way market.” That leads to more accurate pricing that reflects real market sentiment. It also brought institutional players into the market alongside retail, which is essential for a healthy marketplace. The price had a short-term negative reaction, but in the long run it has far exceeded the initial value.”