Can’t Handle Bitcoin Price Volatility? Try This Instead
Sometime in the fourth quarter of 2017, the super-powerful Chicago Mercantile Exchange (CME) will introduce futures contracts on the popular cyber-currency Bitcoin (BTC), marking a day that will be, for nerdy financial types everywhere, what Woodstock was for the 1960s Counterculture movement.
One of the most respected financial entities in the U.S., the Chicago Mercantile Exchange made the surprising announcement this week and will begin offering derivative contracts (futures) on Bitcoin as soon as they obtain regulatory clearance. The news caused either extreme shock or unbridled happiness, depending on who was listening.
The Very Short History of Bitcoin
Until now, Bitcoin has been fighting a mostly losing battle to gain ground as a mainstream asset class, but its volatile price swings from minute to minute had so far prevented that from happening. Now that the CBE is on board as a guarantor of contract delivery and price stability, most experts think Bitcoin will make the big leap into portfolios after eight years of waiting.
The decentralized digital currency was released as open-source software in 2009, and no one is really sure who invented it, though conspiracy theories abound. With transactions taking place on a peer-to-peer system directly between users, Bitcoin is considered the first “virtual” form of money and has inspired thousands of imitators, only a few of whom have been successful.
Safety First, Profits Later?
This unexpected move by the CME means that investors will now be able to deal with the inherent risk of Bitcoin, thus making it much safer to trade and hold. With that kind of accessibility, it is thought that the price will stabilize and the globe’s only legit cyber money might just be headed for long-term survival.
CME’s managing group handles all the futures business on the Chicago Mercantile Exchange, the Chicago Board of Trade, as well as the NY Mercantile Exchange. In all, the three exchanges comprise the globe’s single largest futures/derivatives market.
Doubts about the Future of Futures
But not all are happy about the decision. At least a few academic leaders and members of the financial regulatory community think that CME has overreached in deciding to offer derivatives on Bitcoin. Unlike wheat and other more price-stable commodities, Bitcoin’s price is wildly unpredictable, and hitching it to a futures market can’t guarantee price stability, so the argument goes.
Bad Boy Bitcoin is Despised by the SEC
Back in March 2017, the Securities and Exchange Commission rejected outright a request by financial dealers the Winklevoss brothers to create an Exchange Traded Fund based for Bitcoin. The SEC’s primary objection was that half of the crypto-currency’s trading takes place on unregulated exchanges overseas, far out of reach of SEC investigators. That probably means there’ll be no Bitcoin ETF in the near future, until and unless the way it’s traded changes significantly.
Don’t Forget about the FBI
What does the FBI have to do with Bitcoin? When the Bureau shut down the online black market known as the Silk Road in 2014, it seized the assets of the owners. That cache included a Bitcoin wallet worth about $120 million, making the FBI one of the world’s largest holders of Bitcoin.
Spend enough time in financial chat rooms and you’ll no doubt bump into all the creepy and wacky theories about how the FBI is doing shady things with its crypto stash, the oddest of which includes a manipulation scheme to eventually tie Bitcoin values to the U.S. dollar.
If that were to happen, Bitcoin as we know it would cease to exist and would merely become another appendage of the world’s most boring investment, the dull U.S. Dollar. That would spell no more super-profits or Wild West atmosphere for “invisible currency” enthusiasts.
How to Buy Bitcoin Without Going Broke?
The most popular way to buy Bitcoin is via one of the three online sellers, Coinbase, BitStamp, and Local Bitcoins. Each has its pros and cons, but it really depends on how a buyer wants to transact business.
The good news is that every Bitcoin is divided into 100 million units, so you don’t have to buy a “whole” coin. At Coinbase, buyers purchase directly from the company at a markup of about 1 percent. BitStamp is different in that it acts more as a middleman in the transactions between its site’s buyers and sellers.
For those who want to conduct business offline, Local Bitcoins is the way to go. That site simply helps buyers and sellers connect. Transactions then take place offline between the two parties.
Crypto-Investors are Chomping at the Bitcoin
They said it could never be done. As recently as 2010, the value of Bitcoin was hovering around one-percent of one Australian cent. Today, in that same currency, a Bitcoin is roughly valued at $10,000. As any math geek can tell you, that’s a 10 billion percent increase in value. Not bad for early adopters who were laughed at, in Australia and elsewhere.
In the world of crypto-currencies like Bitcoin, seven years is a lifetime, and 10 billion percent returns are part of the psycho-environment that has seen crypto money replace penny stocks as a new playground for the peculiar.
Wall Street Cred
Call Bitcoin enthusiasts what you will (and they have been called everything from crypto-kooks to Bit-bonkers and worse), when the CME posts that first futures contract, all those nerdy Bitcoin basement-dwellers will gain instant street-cred in the financial world.
After that watershed calendar date, it won’t be too long before the king of cyber-currencies shows up as an ETF (a foreign-based one anyway), and as common components of pension funds and portfolios of everyday investors.
Futures contracts on invisible money might be an attractive investment to some, but hard-asset advocates will no doubt be crying “Bah, humbug!” True Bitcoin believers, no longer glued to monitors in shadowy basement corners, will finally be standing alongside traditional investors in trading rooms and brokerage houses all over the world.
Woodstock for crypto geeks will be an historic day in global financial history, as cries of “Make profits not war,” “Hell no, we won’t sell,” and “Tune in, turn on, and go long,” fill the air. The era of “derivatives on a concept that has no substance” will have arrived, and the new king, Bitcoin, will waltz into the financial mainstream.