SINGAPORE (June 17): When bitcoin was born, it was a symbol of counterculture — a rebel currency with near-anonymity and a lack of regulation. A decade later, there are growing signs it is entering the establishment its creators sought to subvert.
As the cryptocurrency has surged in value, bigger investors, from trading firms to hedge funds, have increasingly turned to exchanges regulated in traditional financial centres. They are buying bitcoin futures to gain exposure to the asset while avoiding the hacks and heists that plague the industry.
The crypto market, associated by many with the dark web, money laundering and the Wild West, is beginning to be discussed by financiers in the same breath as derivatives, hedging instruments and compliance.
Investors ploughed record levels of money into bitcoin futures at regulated exchanges in the US and UK last month, hungry for a piece of the action but seeking the kind of protection that will satisfy their compliance officers.
Between March and May, bitcoin more than doubled in price, an ascent peppered by double-digit price swings reminiscent of its 2017 bubble, which was driven by smaller retail investors.
During that period, Chicago-based CME Group’s average daily volumes of futures contracts climbed over seven-fold to a record US$508 million ($694 million) in May. The number of open interest contracts — those that have not been settled — also hit a record.
CME says bitcoin’s price gains, and the subsequent increase in volatility, attracted new investors seeking to hedge risk.
“It’s logical that [institutional investors] would want to be moving in this direction, especially considering their size and how much more there is at stake,” says Joel Kruger, currency strategist at LMAX Exchange Group.
Hedging instrument
Futures — financial contracts that lock buyers and sellers into trading an asset at a set date and price — are seen as key components of any mature market, as they boost market liquidity and allow investors to bet on the direction of prices.
“It’s a useful hedging instrument,” says Daniel Matuszewski, head of trading at Goldman Sachs-backed crypto firm Circle. “Futures are much easier to trade, much easier to use for hedging, much easier to get leverage on.”
Playing out in the spiking demand is the emergence of a twin-track global bitcoin futures market — on “onshore” exchanges such as CME and “offshore” exchanges, which are more lightly regulated and still command the bulk of the multi-billion-dollar daily market.
Onshore exchanges — those regulated in established financial centres — are usually subject to strict checks on governance, technology and client vetting. They demand a high degree of transparency.
Offshore platforms, in contrast, are typically registered in jurisdictions with less onerous rules. They tend to accept business from investors who can sign up with few checks on their identity or the provenance of their funds.
‘Stars have aligned’
Offshore exchanges have offered bitcoin futures since as early as 2011. One of the biggest, Seychelles-registered BitMEX, says it now accounts for over 65% of global cryptocurrency derivatives trading. Trading volumes were US$4.3 billion in May, it says.
BitMEX CEO Arthur Hayes says, however, that larger investors were being increasingly drawn to onshore exchanges such as CME.
“It’s the perfect product [for bigger investors] — it’s US-dollar based, they never have to touch actual bitcoin, it’s financially settled,” he says.
The launch by CME and rival Cboe Global Markets in December 2017 marked the first time mainstream exchanges offered cryptocurrency derivatives.
They initially faced tepid demand. Cboe said in March, when bitcoin languished below US$4,000, that it planned to discontinue its futures, with the final contracts expiring this month.
The growing gap in the market for futures from onshore exchanges is stimulating growing competition and attracting new entrants, such as ICE.
Sui Chung, head of cryptocurrency pricing products at Crypto Facilities, says compliance-wary institutional investors had been assessing the various futures products offered by regulated exchanges for some time as they awaited a spike in prices to allow them to enter the market.
“This is the first time those stars have aligned,” he says.
