Nice that we have Bitcoin futures. Merrill Lynch said they would not let their clients have access to them. So glad Big Brother is watching out for them. Volume in at the CBOE and CME is very small. To give you some idea at CME it’s trading less than Pork Bellies did and they delisted the belly contract because it was not useful anymore.
However, I do think futures are useful for holders of the contract, speculators, and entities that want to transact. I don’t think the volume will remain small but it’s not going to rival some of the bigger established contracts out there. If Bitcoin gets to be as big as the Lean Hog contract, it will be successful and provide the necessary risk management it needs to provide.
The thing is, crypto is much larger than Bitcoin. The entire ecosystem will be huge someday as blockchains work in the backroom to power things that once were centralized databases. There are a lot of issues to work through but it is very early days. Capacity on blockchain is anaemic. Trades cannot clear.
My friend William Mougayar created an index. It’s essentially a hedge fund. Here is a link to it. He has picked 15 cryptos out of about 1400 and created the index. That’s my point, while Bitcoin and Ethereum get all the headlines there are plenty of other cryptos out there that can have risk managed. Volumes will be small given their market caps today. But, there is still risk that can be hedged and managed.
One thing about marketplaces, once network effects get built and established they are awfully hard to disrupt. I am seeing more exchanges come up. a16z just funded dY/dX, a derivatives exchange. They are going to clear on the blockchain. I read their white paper and I don’t mean to be critical of their exchange. Hard to tell anything until the exchange is operational but one hallmark of the traditional centralized exchanges is that there is a lot of transparency and ease of finding things. A broker and clearinghouse regulate who can trade and how much. Governance is transparent and there are clear standards. For example, in CME’s rulebook Rule 514 governs how to trade.
Most alt-coins have all appreciated this year except for Litecoin who’s founder cashed out 100%.
LIVE from LITECOIN HQ as literally every other alt coin busts parabolic new highs. pic.twitter.com/bHwZApgZ5r
— Andy Swan (@AndySwan) January 4, 2018
There were no Litecoin futures to hedge. The founder couldn’t take the risk anymore. He gave a shitty reason for getting out though.
There are a few bottlenecks to establishing exchanges. One is regulatory. The SEC or the CFTC have to give approval. The other is not regulatory. It’s more about competitive landscapes and strategy. There are a wink and a nod given by regulators to private companies that help reinforce moats. For example, if I am a bank and want to toss out my core banking technology and adopt a cloud-based very light and easy to innovate on technology based on new protocols, it’s almost impossible. When the regulator shows up at my door they ask what technology I am using and if I say, “I adopted cutting-edge tech to service my customers better” that regulator is going to do a deep dive on all my banking practices/accounts. That makes existing players leery of adopting new tech-and it makes it much harder for new companies to get started.
Any new exchange is going to have to deal with the Merrill Lynch’s of the world. The more the traditional world of regulators, brokerages, exchanges, and clearing digs their heels in and tries to blockade the competition brought out from crypto, the more the crypto world will innovate to go around them. Back in 1999 we discussed disintermediation of traditional brokerages by an exchange extensively. Not just one conversation, but many series of conversations and side conversations. The timing wasn’t right then but it might be today. My friend and former CME Board colleague Jack Boudroujian tweeted,
Blockchain, maybe Bitcoin, will disintermediate the CC companies, Banks and change the financial landscape. The future of capital is global and digital! Blockchain will do to the capital markets what Amazon did to the retailers.
— Jack Bouroudjian (@JackBouroudjian) January 4, 2018