Bitcoin Futures Launched at Chicago Exchange

Bitcoin has landed on Wall Street with a bang. Futures on the world’s most popular cryptocurrency surged as much as 26% from the opening price in their debut session on Monday on Chicago Board Options Exchange Global Markets Inc.’s exchange, triggering two temporary trading halts designed to calm the market.

Initial volume exceeded dealers’ expectations, while traffic on Cboe’s website was so heavy that it caused delays and temporary outages. The website’s problems had no impact on trading systems, Cboe said, Bloomberg reported.

The launch of futures on a regulated exchange is a watershed for bitcoin, whose surge this year has captivated everyone from mom-and-pop speculators to Wall Street trading firms. The Cboe contracts, soon to be followed by similar offerings from CME Group Inc. and Nasdaq Inc., should make it easier for mainstream investors to bet on the cryptocurrency’s rise or fall.

Bitcoin wagers have until now been mostly limited to venues with little or no oversight, deterring institutional money managers and exposing some users to the risk of hacks and market breakdowns.

Bitcoin futures expiring in January climbed to $17,540 in London from an opening level of $15,000, on 2,798 contracts traded. The spot price climbed 6.4% to $16,647 from the Friday close in New York, according to the composite price on Bloomberg.

The roughly $900 difference reflects not only the novelty of the asset but also the difficulty of using the cash-settled futures to trade against the spot, strategists said.

Market Transparency

Proponents of regulated bitcoin derivatives say the contracts will increase market transparency and boost liquidity, but skeptics abound. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon has called bitcoin a “fraud”, while China’s government has cracked down on cryptocurrency exchanges this year. The Futures Industry Association—a group of major banks, brokers and traders—said this month that contracts in the US were rushed without enough consideration of the risks.

So far though, trading has kicked off without any major hiccups. Dealers said volume was high for a new contract, even though it was tiny relative to more established futures. And the trading halts took effect just as Cboe had outlined in its rules.

 Transactions stopped for two minutes after a 10% gain from the opening price, and for five minutes after a 20% jump. Another five-minute halt will take effect if the rally extends to 30%, Cboe said in a notice on its website. CBOE tweeted that nearly 1,000 contract trades had been placed after two hours of initial trading.

Not a Bubble

To call bitcoin the biggest and most obvious bubble in modern history may be a disservice to its surreality. The price of bitcoin has doubled four times this year. In early January, one bitcoin was worth about $1,000. By May, it hit $2,000. In June, it breached $4,000. By Thanksgiving, it was $8,000. Two weeks later, it was $16,000, The Atlantic reported.

This astronomical trajectory might make sense for a new public company with accelerating profits. Bitcoin, however, has no profits. It’s not even a company. It is a digital encrypted currency running on a decentralized network of computers around the world. Ordinary currencies, like the US dollar, don’t double in value by the month, unless there’s a historic deflationary crisis, like the Panic of 1837. Instead, bitcoin’s behavior more resembles that of a collectible frenzy, like Beanie Babies in the late 1990s.

But defining and identifying bubbles is harder than it seems (kind of like defining bitcoin). The term technically refers to an asset whose price dramatically exceeds its intrinsic value. But who determines price and value, anyway? Those aren’t scientific concepts with formulas, like gravity or the length of a hypotenuse. They are the co-creation of buyers and sellers whose needs and attitudes are constantly changing.

In a way, the emergence of cryptocurrencies is akin to the dot-com era, because there is no perfect comparison to illuminate the “real” value of something like bitcoin. It’s a currency (like the dollar), whose owners consider it a long-term store of value (like silver), which is appreciating as if it were a faddish collectible (like a Beanie Baby), and is running on a blockchain platform, which some insist could change the future of everything from legal titles to daily payments (like Internet).

How can one be so sure bitcoin is a bubble if we don’t even know what the proper comparison is—dollars, silver, Beanie Babies, or the Internet?