Bitcoin may be the hottest financial asset of 2017, but many investors have had a surprisingly hard time getting a hold of it. For those unable or unwilling to jump into the unfamiliar world of bitcoin wallets and unregulated bitcoin exchanges, there's been few good ways to get exposure to the surging digital currency.
That could soon change. A number of new financial products tied to bitcoin could begin trading on regulated exchanges as early as this year, opening the door for investors of all stripes to get in on the cryptocurrency craze―perhaps even providing an opening for the first bitcoin ETF.
Bitcoin Options And Futures
The first of these new bitcoin products was revealed last month, after the U.S. Commodity Futures Trading Commission (CFTC) granted LedgerX authorization to provide clearing services for fully collateralized digital currency swaps.
With CFTC approval in hand, LedgerX announced it would be offering options on bitcoin to institutional investors this fall, making it the first federally regulated bitcoin options exchange.
Not to be outdone, a week later, the Chicago Board Options Exchange (CBOE) reported it was planning to launch cash-settled bitcoin futures in the coming months. The futures―which are pending regulatory review by the CFTC―could begin trading in Q4 of this year or early 2018, according to the CBOE, and would be supported by market data from the Gemini digital asset exchange.
If they come to fruition, these options and futures on bitcoin would be revolutionary, potentially enabling billions of dollars of institutional money to come into the digital currency space.
“A U.S. federally regulated venue for derivative contracts settling in digital currencies opens the market to a much larger customer base,” said Paul Chou, CEO of LedgerX. “We are seeing strong demand from institutions that previously could not participate in the bitcoin market due to compliance restrictions against unregulated venues.”
And it might not stop with bitcoin. LedgerX anticipates launching options on ethereum―a rival cryptocurrency―in the near future, while CBOE will explore adding futures on other digital currencies, "on a case by case basis," according to Hannah Randall, director of communications for Bats Global Markets, a CBOE company, which is also the parent company of ETF.com.
‘75% Chance’ For A Bitcoin ETF
Bitcoin derivatives trading on regulated exchanges sometime this year is not something many would have imagined only a few months ago. It's being made possible thanks to the CFTC's hand-off approach to digital currencies.
While quick to note that it is not endorsing the "use of digital currency generally, or bitcoin specifically," the CFTC's approach contrasts sharply with that of the Securities and Exchange Commission (SEC), which rejected a pair of bitcoin ETFs earlier this year, citing a lack of regulation in the bitcoin market.
Which raises the question―if bitcoin derivatives begin trading on regulated exchanges―could the SEC change its mind about the digital currency and approve the first bitcoin ETF?
For Spencer Bogart, head of research for Blockchain Capital, the answer to that question is unequivocally "yes."
"If we actually get bitcoin derivatives and they generate significant volume―which I think they would―then that paves the way to an ETF approval," explained Bogart. "If you look at what the SEC said in its ETF disapproval from earlier this year, it essentially needed to see the underlying bitcoin spot market become more regulated, or it needed to see a fully functional derivates ecosystem that is regulated."
"It looks like we’re going to get the latter," he added, while noting that he puts the chances of a bitcoin ETF coming to market in the next 18 months at over 75%.
Issuers Positioning Themselves
Indeed, some ETF issuers are already positioning themselves for a more favorable shift in the SEC's view of bitcoin once derivatives are launched. Last Friday, VanEck filed for a new actively managed ETF called the VanEck Vectors Bitcoin Strategy ETF.
The proposed fund would invest in U.S. exchange-traded bitcoin-linked derivative instruments, according to the prospectus.
There's also the potential for the Winklevoss Bitcoin ETF (COIN)—which was rejected by the SEC in March—to make a comeback in light of the new developments in the bitcoin market. The commission is currently reviewing its initial decision.
COIN was designed to hold "physical" bitcoin, but presumably, could easily pivot to holding bitcoin futures if that made it more likely to be approved. After all, the same Winklevoss twins who are behind COIN also run Gemini, the digital asset exchange that is collaborating with the CBOE to launch bitcoin futures.
It's been stunning how fast expectations for a bitcoin ETF have turned. Hopes have been as volatile as the digital currency itself, which was last trading at an all-time high around $4,350, up 350% on the year.
After prospects for a bitcoin ETF crumbled following the SEC's rejection of COIN in March, excitement is again building rapidly in light of the latest news from LedgerX and the CBOE. Blockchain's Bogart thinks all the excitement and new money will push bitcoin significantly higher―to $5,000-$10,000 in the near term.
"We could easily see a 50% correction, but the way I see the sentiment changing, and knowing we have a derivatives market coming online, I would not bet on a drop," he noted.
Contact Sumit Roy at [email protected]