Bitcoin, The Long View: Wedbush’s Bob Fitzsimmons Says We’re Just Beginning To Build A Market For Bitcoin
In December 2016, it was announced Bob Fitzsimmons would take the reins at Wedbush Securities as managing director and head of Wedbush Futures. Almost a year to the day later, he pushed Wedbush to be one of the first FCMs to offer a brand new product, bitcoin futures from Cboe Futures Exchange and CME Group. JLN’s Jim Kharouf sat down with him at the recent Fintank CryptoCon event to talk about just how well the separate contracts are doing, who is trading them and who wants to get on board.
Q: Now almost two months into the launch of bitcoin futures, how would you assess them?
A: I think it has done incredibly well. When the CME launched on Sunday December 17, 2017, that Monday, someone asked me, who won? I couldn’t tell if they meant who won on Sunday Night Football or CME vs Cboe Futures Exchange. I think we’ve been conditioned to look at these things in the very short term. But being at the vanguard of this launch, there are a lot of people out there who haven’t even scratched the surface of this.
There are a lot of MIT Ph.D.s who have been mining these things for years. I’m surprised at how long this has been out there in terms of digital currencies and how many businesses have been built out there. Then you get off on tangents such as ICOs and then the ponzi schemes. There are some legitimate businesses out there that many people are a part of. It’s like 1989 and someone is trying to predict where the internet is going. So long-term, we’re only just beginning. If we look at this in battle terms, the volumes we are seeing in futures are just skirmishes.
Q: What is the customer demand for them now?
We’re seeing everything from retail to professional trading groups to bitcoin mining firms, the true hedgers that want to hedge the underlying. At our Wedbush Efutures brokerage, we’re seeing retail going long.
I think when people look at the cash markets, they are a bit more convoluted. It’s cumbersome. So with people who have committed early – there have been a lot of one lots that have been bought. The hedgers are spreading between the spot and futures exchanges and its hard to hedge on spot exchanges. It’s hard to borrow to go short on spot exchanges.
So the customers we are having conversations with say, “If we’re going to go short, I’d rather do it on the CME or CFE, cleared by CME or OCC, and have my money in dollars. So even in a worst case, if somebody steals an ewallet or somebody crashes an exchange, I am short over here in futures and I get my dollars out.”
Q: So you are seeing real miners in the futures market?
A: There are real miners in the market and there are real miners who are interested in being taught about the market. They want to understand how margin moves, how to roll it every quarter or how to buy puts and sell calls even though there are no options on the product yet. So there are discussions with these participants and it’s going to take awhile.
Q: Some of the criticism to date has been that they are too expensive – with high margins and high account minimum requirements. Is that keeping customers out of the market at this point?
A: So, the margin is about 45 percent and some say it is 100 percent. But again, looking at this long term, you don’t want to have a debacle. In looking at our customers, it’s people sticking their toe in the water. And they are preparing for this long term. Nobody pushed back on us requiring 200 percent margin, no one. We did ask for additional funds and those were significant, be it that $5 million had to be in the account to trade this. But I think it’s everyone wanting to be careful to see how this plays out. At some point those restrictions that we put on top of those margin levels may come down a little bit. But that is not going to dictate the success or failure of the product. It’s going to be those hedgers getting involved, or a building out of the cash markets where you get a true facility to lend and borrow bitcoin, similar to how you borrow a stock or bond. That doesn’t exist yet.
Q: As you have looked at the spread between the cash and futures, what are you seeing?
A: When the futures launched, the spread between the cash and futures was about $1,400 to under $1,000 to around $30 or $40. Now that you have a stable basis, I would expect the next thing to develop would be the EFP (exchange for physicals) market, and at CME, they call it the EFRP or Exchange for Related Positions. So as you spread in and out of the market and accumulate positions, you can sell at say 35 and someone is buying at 25, maybe you and I just swap out positions and scratch the spot, and then deliver to the exchange instead of legging out of it. I think that is going to be next.
Q: How are customers trading bitcoin futures, meaning, are traders doing arbs between CME and Cboe contracts, or spreads between bitcoin futures and other futures?
A: We’re definitely seeing a lot of spreaders but the next thing is how do you access that cash market? And how do I use my cash bitcoin to satisfy margin or deliver it to the prop. That’s why I find it interesting to see DRW asking for a physical settlement of bitcoin futures because that ensures convergence.
Q: What are we seeing on the regulatory side of things?
A: We could talk for hours about the proper regulation. The trick now is, how do you stop bad actors but be bold enough to look at Dodd-Frank and even Sarbanes-Oxley and see the unintended consequences. What I like about CFTC Chairman Chris Giancarlo is that the agency seems to be taking things from an economist’s perspective. What is the marginal cost versus the marginal benefit?
Q: Education appears to be needed here – if this is going to grow from a retail or institutional standpoint, what is Wedbush doing there and what is needed?
A: We’re sitting down with the larger players, meeting with those involved in mining bitcoin. We’ve sat down with all the spot exchanges. And it’s the same with the exchanges, telling them this is what you need to do, this is what the customers need. I don’t think they really differentiate the 75,000 customers that sign up per day and identify that this guy has a $400 million hedge fund and this guy is a retail trader with $40,000 trading from his basement. So we’re trying to help them navigate that and prioritize.
From the customer side, we’ve done some education online but most of our education is in face-to-face meetings.
Q: Your thoughts on where this asset class can go in the coming months?
A: It’s early days and difficult to predict. We’re definitely investing more in it and spending more resources on it. Whether bitcoin survives or something surpasses it, I don’t know.