Bitcoin's first 24 hours on Wall Street feed euphoria and doubts

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The first bitcoin future trades kicked off with a bang, some analysts say its futures pricing suggested investors see price increases moderating.
A collection of Bitcoin tokens displayed in a picture illustration PHOTO: REUTERS

NEW YORK (BLOOMBERG) Bitcoin's triumphant debut on Wall Street has not ended the financial industry's scepticism.

The new breed of futures contracts that launched on Cboe Global Markets' exchange late on Sunday (Dec 10) quickly became a 24-hour microcosm of bitcoin's own wild ride this year, marked by technical glitches and surging valuations. The first day left true believers cheering, yet kept many mainstream financial professionals peering uneasily from the sidelines.

While the derivatives were a success by some key measures - they did not blow up - their 24 per cent rise in price in the first session also bolstered longstanding misgivings about speculation. The contracts offer an easier way for investors to short the cryptocurrency, but instead buyers bid them up as much as 13 per cent higher than the underlying asset - setting off two temporary trading halts along the way. That gave new oomph to the rally and debate.

"The premium is a bullish indicator," said Michael Kazley, co-founder of Crescent Crypto Asset Management, acknowledging he assumed the contracts would more closely track the cryptocurrency. "It can be explained by demand for exposure to the price of bitcoin from investors who otherwise cannot or do not want to own actual bitcoins."

Others saw the gap as a sign that it may not be possible to marry the virtual currency with the traditional financial industry. When contracts expire, buyers get cash - not bitcoin itself - weakening links to the underlying asset. The worry is that derivatives will act too independently.

"The futures market opening was a mild disaster in many respects," said Aaron Brown, a former managing director at AQR Capital Management who invests in the cryptocurrency and writes for Bloomberg Prophets.

"It was supposed to mimic the price of the physical, it wasn't supposed to hit limit triggers twice."

Wall Street trading desks have been yearning for more volatility in many asset classes this year, so they can make more money handling client transactions. Bitcoin may be too volatile. An industry group made up of big banks, brokers and traders said last week it was concerned that the cryptocurrency's volatility could lead investors to default on contracts if prices swing hard.

Some of the world's largest banks maintained their cautious stance on Monday. Firms including JPMorgan Chase & Co, Citigroup and Morgan Stanley are continuing to evaluate whether they will offer clearing of the futures, according to people with knowledge of their deliberations.

Cboe launched bitcoin futures at 6pm New York time on Sunday. During the first hour, traffic on its website was so heavy that it caused delays and temporary outages, without interfering with trading systems. CME Group, the world's biggest exchange owner, is set to launch similar products on Dec 18.

The futures trading legitimises bitcoin to some degree, said Kevin Grimes, president of Westborough, Massachusetts-based Grimes & Co. It allows more institutional money to flow in, while giving firms a way to hedge positions.

The price gap shows people are seeking exposure to bitcoin without buying it directly, he said.

"So in the short run that could change the supply and demand a little bit," he said. "But in the grand scheme of things it probably is a good thing for bitcoin structurally, because it will allow for larger amounts of institutional money to more comfortably buy positions."

The new futures will probably help create a more regulated and steady underlying market, paving the way for more additional products, hedge fund lawyer Stephen Bielecki of Kleinberg, Kaplan, Wolff & Cohen wrote in a note Monday. Many anticipate that the Securities and Exchange Commission will eventually approve an exchange-traded fund tied to bitcoin, he said.

For its part, bitcoin rose 9.6 per cent to US$17,148 on Monday - a roughly 17-fold advance this year.

"Our view on bitcoin is unchanged," said Tim Ng, chief investment officer of Clearbrook Global Advisors. "The valuation has no basis, as there are no assets to back it, nor does it have the faith and full credit of a recognised entity such as a central bank. This has been a one-way street with people putting in money, and no one coming out.

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