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Crypto Futures and Institutional Interest: Looking in the Wrong Place

Noelle Acheson is a veteran of company analysis and member of CoinDesk’s product team.

The following article originally appeared in Institutional Crypto by CoinDesk, a newsletter for the institutional market, with news and views on crypto infrastructure delivered every Tuesday. Sign up here.


Last week, the Cboe let its traders know that it would not be renewing its futures contracts on bitcoin.

This was taken by many as a sign that expectations of institutional interest in crypto assets were misplaced, and by some as a nail in the crypto coffin.

If a significant venue like the Cboe doesn’t see a future in offering a product that institutional investors allegedly require, then obviously there’s no demand, right? And if the institutions don’t bring their money and legitimacy into the market, where is the much-needed liquidity going to come from?

As usual, the reactions are overblown. The news is neither significant nor bad for the sector’s outlook. It does, however, shine a light on the recurring role of misplaced expectations in driving market narratives.

Natural selection

Cboe was the first traditional institution to offer bitcoin futures, launched in December 2017. It was followed a week later by a similar product from the CME. In the end, although volumes have been declining at both, institutional traders seemed to prefer the CME’s product. Let’s look at why.

First, the CME is larger than the Cboe Futures Exchange, and in commoditized markets, size matters. Brokers would logically prefer to trade on a platform where they already have connectivity.

Second, settlement methods are important, since they determine a position’s profitability.

Cboe used the Gemini auction price to determine the value of its contracts – a price determined once a day on thin volume. The CME relied on an index comprised of data from a handful of liquid exchanges. Although the reliability of this pricing method has also been questioned, it seems that institutional traders saw the index as the less manipulable of the two options.

The suspension of one particular type of bitcoin futures contract usually says more about product structure than the underlying commodity and is far from an isolated incident.

By some estimates, more than half of futures launches fail to reach critical mass, and simply fade away.

No big deal

The withdrawal of this product is unlikely to make a noticeable impact on trading strategies. Volumes were low, and since the CME has stated its intention to continue offering its version, those that used the Cboe can relatively easily switch to the more liquid contract.

What’s more, the utility of cash-settled derivatives to hedge bitcoin positions is a contentious point. Many claim that what the market needs is regulated physically-settled bitcoin futures. These will supposedly make the market more robust by providing a more reliable and less manipulable hedge.

With cash-settled futures, the value of the product depends on market information, which – in a relatively illiquid market – can be manipulated. With physically-settled futures, you take delivery of the underlying bitcoin. You can then hold on to the asset, or sell it in the market at a “real” price.

The eventual launch of Bakkt and ErisX, which plan to offer physically-settled bitcoin futures, will bring an alternative product into the institutional toolbox.

But those that expect physically-delivered futures to be the trigger that brings institutional players into the market in volume are likely to be as disappointed as those that expected cash-delivered futures to perform that feat.

Looking for signs

That is the main takeaway from this news: that there is no “key” to institutional involvement. And no matter how many of us agree that we have identified the missing piece, we will be wrong.

The narrative that institutions would get involved has been constant – the supposed trigger, however, has swung from derivative products to custody solutions to regulation (and I might be missing a few steps in there), and will no doubt pivot to something else as legal clarity continues to emerge without a corresponding price bump.

In looking for something simple to grasp and monitor, we are trying to fit the birth of a new asset class into a convenient linear progression. We are trying to fit a five-dimensional concept into a unidimensional construct – and, yes, it is as impossible as it sounds.

Identifying narratives is a necessary step, though, that enables us to separate signal from noise, and to shape investment theses and production decisions.

The narrative that institutions are interested in crypto assets is a sound one. Many are already investing in this market. Family offices and traditional hedge funds have been dipping their sizeable toes in for some time now, and we are even seeing old-school institutions such as pension funds and endowments starting to take this new asset class seriously.

Where we get it wrong is in expecting institutions to wait for a specific green light. In reality, they are waiting for a matrix of signals that does not conform to our linear way of thinking.

As even a cursory glance at CoinDesk’s headlines will reveal, the shift is happening, in both subtle and obvious ways. The technology is progressing, regulators are working hard to figure out the right strategy, and investors of all types are learning and experimenting.

This progress may seem slow, but it is steadily building the base for an acceleration. Thinking that we can predict when that will happen is ambitious.

To steal a phrase from Hemingway, the involvement of institutional investors in crypto assets will happen “gradually, then suddenly.” As almost all profound changes do.

John Tornatore, Cboe Global Markets, image via CoinDesk archives 

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CBOE Will Not List Bitcoin Futures in March, Cites Need to Asses Crypto Derivatives

The Chicago Board Options Exchange will not add a new Bitcoin futures market his month.

The Chicago Board Options Exchange (CBOE) will not add a new Bitcoin (BTC) futures market in March, the firm said in a statement on March 14.

Per the statement, CBOE is re-evaluating how it approaches trading digital assets. CBOE said:

“CFE is not adding a Cboe Bitcoin (USD) (“XBT”) futures contract for trading in March 2019. CFE is assessing its approach with respect to how it plans to continue to offer digital asset derivatives for trading. While it considers its next steps, CFE does not currently intend to list additional XBT futures contracts for trading.”

The currently listed futures, XBTM19, will expire in June. CBOE notes that all currently listed futures are still available for trading.

In December 2017, CBOE launched Bitcoin futures trading, followed closely by its competitor, the Chicago Mercantile Exchange (CME).

Futures contracts give investors exposure to an underlying asset — in this case Bitcoin — without the need to actually own any. Instead, investors buy contracts that track the underlying price of the asset and speculate on whether the contract price will increase or decrease by its expiration date. In the case of the CBOE Bitcoin futures market, the difference is then settled in U.S. dollars.

Earlier this week, a report from Bloomberg stated that the Bitcoin price could be headed for another large selloff. Analysts said that key technical indicators such as the Moving Average Convergence Divergence had been moving downward since mid-February. Bloomberg analyst Mike McGlone said:

“The entire industry is ripe to resume a path to lower prices. Conditions are akin to November [2018], just prior to the collapse…”

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Countdown Restarts Tomorrow for SEC Decision on CBOE-VanEck Bitcoin ETF

The U.S. Securities and Exchange Commission (SEC) may make an initial decision on not one, but two different bitcoin exchange-traded fund (ETFs) proposals by April 5.

A bitcoin ETF proposal submitted (for a second time) by VanEck, SolidX and the Cboe BZX Exchange is expected to be formally published in the Federal Register Wednesday, kicking off the initial 45-day clock for approval, rejection or extension. The proposal was first posted on the SEC’s website on Feb. 13.

Once the proposal is officially published, the general public will have three weeks from Feb. 20 (meaning until March 13) to file their initial responses to it. Then the SEC will have another three weeks, until April 5, to make a decision or give itself an extension.

At the moment, the proposal appears in the Public Inspection section of the Federal Register website, meaning it has not yet been officially published. As the current page notes, “only official editions of the Federal Register provide legal notice to the public and judicial notice to the courts,” while the most recent version of the proposal itself says that it is scheduled to be published Wednesday.

The VanEck/SolidX proposal will join one filed by Bitwise Investment Management and NYSE Arca, which was published in the Federal Register on Feb. 15, meaning the SEC has until the beginning of April to decide on it or postpone the decision.

The Bitwise/NYSE Arca proposal was previously filed last year, and was widely expected to be the first proposal to be approved by the U.S. securities regulator. However, this proposal was withdrawn during the longest U.S. government shutdown in history and re-filed at the end of January.

If approved, an ETF could potentially bring new liquidity into a bitcoin market that is starting to show signs of recovery. However, it’s important to remember that the SEC can give itself up to three extensions on any rule change proposal, meaning it could still be months before a final decision is reached on either ETF.

Early feedback

While the formal comment period has not officially opened yet, the VanEck/SolidX proposal is already receiving feedback.

The filing’s first response, listed as from Sam Ahn at Hana Trading, asks how the companies are defining bitcoin’s intrinsic value. The question of intrinsic value is important for investors who may consider buying into the ETF, Ahn explains.

Ahn’s response links to seven previous responses on different ETF proposals, all of which also question bitcoin’s intrinsic value.

Gabor Gurbacs, VanEck’s digital asset strategy lead, declined to comment on this response.

Gabor Gurbacs image via CoinDesk archives

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Bitcoin ETF Approval Chances Down to 10%, Says Legal Expert

Following last week’s delay of the SEC to decide on whether to approve or not the proposed, commodity-backed bitcoin ETF proposal of VanEck and SolidX, legal expert Jake Chervinsky now says that there is a 10 percent chance of its approval. 


‘I Think the ETF is in Trouble’

Jake Chervinsky, a legal expert who correctly predicted that the SEC will delay its final decision on the VanEck/SolidX Bitcoin ETF proposal into February 2019, now believes there’s a 10 percent chance of its approval.

In a series of tweets, he laid our arguments for why the Bitcoin ETF is now in jeopardy. According to him, the most important reason for a potential rejection is market manipulation.

“The SEC had many concerns — enough for 18 multi-part questions,” he explains. The most important question was about market manipulation. The SEC wanted to know if CBOE BZX (the exchange proposing the ETF) had ‘a surveillance-sharing agreement with a regulated market of significant size.’”

Chervinsky believes this is the most important issue because it was the main reason the Winklevoss ETF proposal was rejected in July 2018 by the Commissioners.

It’s noteworthy that Commissioner Hester Peirce formally dissented against the decision, however, outlining that it “contributes to further delay” of the cryptocurrency market’s maturation.

Lack of Jurisdiction

The legal expert also notes, however, that a big problem for the SEC is their lack of jurisdiction. Chervinsky:

The SEC’s problem is that it doesn’t have jurisdiction over crypto exchanges, so it can’t force them to provide the information it needs to identify & prosecute manipulation (like spoofing & wash trading). Also, it can’t tell if the exchanges themselves are committing fraud.

He concludes, largely predicating on the issue of manipulation, that “if the deadline were today, I’d give the ETF a 10% chance of approval.”

It’s important to note, though, that even if the SEC rejects the VanEck/SoldiX Bitcoin ETF, there is always the possibility of an appeal. This means it will have to be revisited by the Commissioners and their current lineup is different than the one which rejected Winklevoss’ ETF proposal earlier this year.

Currently, there are two Republicans (Peirce and Roisman), one Democrat (Jackson) and Chairman Clayton (listed as Independent but appointed by a Republican). According to analyst John Galt, this may give the Bitcoin ETF a better chance this time around. He notes:

When SolidX is decided, Republicans Peirce and Roisman favoring approval puts Chairman Clayton in the opposite position he was in for Winklevoss. If he opposes approval and sides with Jackson — regulatory gridlock. If he sides with his fellow Republicans, we have approval of a physical Bitcoin ETF. This is how I believe SolidX gets approved.

The final deadline for the decision on the VanEck/SolidX Bitcoin ETF is set for February 27, 2019.

What do you think of the commodity-backed VanEck/SolidX bitcoin ETF proposal? Will it get approved? Don’t hesitate to let us know in the comments below!


Images courtesy of Shutterstock

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CBOE Analysts: Crypto Seas Are Calm With Record Low Bitcoin Futures Volatility

Bitcoin futures trading on the U.S. Chicago Board Options Exchange (CBOE) hit record low volatility levels in October, in stark contrast to the rocky global equity markets.

Bitcoin (BTC) futures trading on the U.S. Chicago Board Options Exchange (CBOE) hit record low volatility levels in October, in stark contrast to the rocky global equity markets, MarketWatch reported Nov. 5.

As Kevin Davitt, senior instructor for The Options Institute at Cboe Global Markets has outlined in a video Nov. 1, the average weekly volatility for the week ending Oct. 26 was just 3 percent for XBT-CBOE Bitcoin futures, the lowest ever level since they launched for trading Dec. 10, 2017.

As of Nov. 1, the average weekly XBT high-low range on front-month Bitcoin futures since inception has been 15.65 percent: as of tax day (mid-April 2018), this weekly average has lessened to a more “subdued,” 10.6 percent, Davitt noted.

Yet on the monthly chart, October overall has seen record-low volatility levels, an average 6.6 percent.

Translating this into concrete numbers, Davitt stated that for XBT futures closing in November, the highest settle price was $6,630 (Oct. 8), and the lowest $6,150 (Oct.11):

“Anyway you carve it, Bitcoin volatility is relatively low, and is declining.”

The analyst added: “the waning cryptocurrency volatility is arguably even more interesting against the backdrop of escalating global equity volatility,” which have been rocked by U.S.-China trade slowdown, protracted trade disputes, and focus on the policies of the U.S. Federal Reserve.

Looking to the crypto spot markets in October, Davitt pointed to the narrow range of total market capitalization, which has fluctuated within a range of just below $200 billion to just above $220 billion, according to CoinMarketCap data.

Total market capitalization

Total market capitalization for all cryptocurrencies, Sep.30-Oct.31, 2018. Source: CoinMarketCap

As a Cointelegraph analysis outlined mid-October, declining volatility levels for Bitcoin itself have been accompanied by waning trade volumes; the coin’s traded volume dropped from $4.2 billion to $3.2 billion on Oct. 7, a fall of almost 24 percent, even though it has jaggedly recovered in recent weeks.

Meanwhile, Bloomberg’s analysts have joined the ranks of those who interpret Bitcoin’s low volatility levels as a positive development; Bloomberg Intelligence analyst Mike McGlone has remarked that high volatility levels have previously been “a major factor lessening most cryptocurrency use cases” and that recently low levels are “a sign of speculation leaving the market and eventually a bottoming process.”