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Other Voices: An Open Letter on Bitcoin Futures

A lot of ink has been spilled over bitcoin and its variants. Lately, the conversation seems to be focused on whether trading bitcoin futures is a good idea. For what it’s worth, my view is that it isn’t a good idea – it’s a great idea.  Consider the following;

  1.  The futures industry exists to facilitate the transfer of risk. What asset (if that is what bitcoin is) could be more in need of risk management tools? Applying rigorous risk management to bitcoin can only help stabilize and legitimize crypto-markets.
  2.  Bitcoin and all of its variants can benefit from some supervision. I regularly hear the argument that cryptocurrencies can’t, or shouldn’t, be regulated, or should be banned outright. These approaches are misguided. Lack of regulation leads to lower business conduct standards and lack of safeguards that in turn lead to hacking and theft (sound familiar?) Also, completely prohibiting trading in these instruments won’t make them disappear. Rather, they will just move underground and no one will really know what is happening. Applying the rigor of futures regulation and experience managing risk benefits everyone.
  3.  Unfettered price swings are not a reason to avoid developing a futures contract. In fact, that is exactly the reason a futures contract is needed. It will be interesting to see whether introducing a bitcoin futures contract reduces volatility in the products and by how much.
  4.  Ties to economic reality in the “real world” isn’t the only measure of value in the 21st century. Facebook as a product exists only on my phone and computer but we don’t dispute its value. Cryptocurrencies are no different. They derive value because we all agree that they do.  Supply and demand don’t just exist in the physical world.  Cyber-supply and cyber-demand can be just as real.  Consequently, bitcoin can serve as a store of value as easily as any physical asset.

Bitcoin markets are basically immature, and developing a futures contract is nothing more than a step toward maturity. Providing risk management tools to bitcoin market participants is what the industry does (and does pretty darn well). Bitcoin traders will be able to rely on established compliance, risk management and operational standards.  FCMs can expect an influx of new clients that probably have not used futures markets previously. Bitcoin futures provide an opportunity for the entire futures industry to shine and demonstrate its utility to our economy and society as a whole. Bring it on!

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