Today’s price of Bitcoin has bitten even the wildest dreams for the growth speed as it is being sold for $ 16,700.  And during the first hours of Bitcoin Futures trade it’s price for January 2018 contract jumped from $15,000 to $18,800.  We have asked Dan Gramza to guide us through fundamentals of the new futures.

Q.: A month ago  in the interview with The  Futures Magazine you have  expressed  a very encouraging for all  Bitcoin traders  opinion, that by the  end of 2017 Bitcoin futures could be traded either on  CME or CBOE, it looks like that it is becoming true. As of December 1, 2017 CME and CFE, along with Cantor self-certified new contracts for Bitcoin futures. What is next?

D.G.: As the CBOE and CMEG futures contracts mature, the expectation would be the creation of options, ETF’s and additional bitcoin futures products such as the one being contemplated by NASDAQ for launch next year.

The volume for these derivative products should be high as private and institutional traders now have means to have bitcoin exposure in a regulated listed market without the need to hold bitcoin. Additional volume will also occur from current holders of bitcoin that want to hedge their position to create downside protection or to increase their position exposure to bitcoin.

It is also only a matter of time before additional regulated derivative listed products will be created on cash products have been derived from the bitcoin concept such as Etherum.

Q.: Do you foresee any institutional support for these contracts which would be sufficient to start trading?

D.G.: Yes, I do think that institutions will support these new derivative products because of the increasing interest in bitcoin from their customer base and they have the comfort of a regulated exchange traded product. Goldman Sachs Group Inc. has indicated that it plans to clear bitcoin futures contracts for certain clients when the derivatives begin trading.  Cumberland Mining, the bitcoin trading arm of Chicago-based market maker DRW currently facilitates bitcoin trades may be interested in the market making in the bitcoin derivatives.

The bitcoin derivatives provide institutional investors and high frequency trading firms around the world that wanted exposure to cryptocurrencies and their volatility, but were concerned about trading in an unregulated market.

Q.: Could you please elaborate more on the idea of development of ETFs based on Bitcoins futures.

D.G.: To create a bitcoin exchange-traded fund (ETF) a cash market reference index is needed and an underlying market.  For example, S&P 500 Depository Receipt ETF is based on the S&P 500 index and the underlying market is the 500 stocks that make up the index.  These 500 stocks are exchanged for the ETF shares in the ETF unit creation process.  The creation of bitcoin futures will make it possible to create an ETF by embedding the futures contract into the ETF creation and redemption process. Therefore, futures will be delivered in the ETF unit creation process. To have a successful bitcoin ETF, market makers need to have the ability to offset risks with a hedging tool and the bitcoin futures would provide that tool.

The ETF would provide another choice for the private trader to trade bitcoin in their stock account and for institutional traders that are barred from investing in the options and futures derivative bitcoin markets to gain and short bitcoin exposure.

The creation of bitcoin futures could allow ETF creators like VanEck to re-submit it’s previously rejected ETF application with the Securities and Exchange Commission.

Q.: Provided   that there are  no regulatory measures on  Bitcoins products  trade and even usage in any country,  what do you think about just core ideas  on which  such regulation  should be based  and  which would not undermine the existing  circulation and trade but also will provide the   necessary risk management tools?

D.G.: Cryptocurrencies are a decentralized global market, so no one regulator is in control.   There would have to be a consensus between multiple parties and countries to create regulations and I do not have a tremendous amount of confidence that this could be achieved.

Regulation of a global market with no authority having jurisdiction is incredibly difficult.  This is what we have experienced in the cash currency market. There have been many attempts to regulate this marketplace in a number of countries but there is no dominant regulator. For the moment, I think regulation of the cryptocurrency marketplace will be similar to the lack of regulation that we have for the cash currency marketplace.

It is estimated that about 40 percent of bitcoin is held by 1,000 users. These users are referred to as whales. These whales could have collusion on their trades in the market which could have influence of price up or down based on information that is not available to the marketplace and in the current bitcoin environment this would not be illegal.

If illegal actions violating the laws of a country occur within a country, then the regulator of that country may be able to step in with enforcement.  For example, if the regulator could show that fraud occurred as a result of rumors that were spread in order to influence price that may be an enforceable action.

Q.: What do you think does the Bitcoins growing popularity increase the value of physical gold, as a saving tool?

D.G.: I think that bitcoin regulated products and gold could both have a place in a portfolio.  I do not think that bitcoin will create dramatic increase in demand for gold. Gold is a product that the market expects to respond to a weaker dollar, inflation or market uncertainty. At the moment, bitcoin at this stage in its life, is marching to the beat of its own drum and provides diversification away from the typical stock portfolio.

There are dramatic differences between the portability of the two products. A large amount of gold is not easy to physically move from one place to another. The same dollar value of bitcoin can be transferred almost anyplace in the world in an instant. .

Another characteristic that makes bitcoin different from gold is there is a finite amount of bitcoins.  Only 21 million bitcoins can be created   this fixed amount could create an additional perception of value for bitcoins as the 21 million production limit is reached…  The actual number of bitcoin’s available to be created is less than 21 million because some bitcoin’s have been lost and additional bitcoin’s will probably be lost in the future.

Q.: At the moment (Dec 3 2017 Bitcoin  price hits 10,771,  starting as we know  this year from  452 on Jan 1, so with these huge speed of growth  lots of rich people  were “born” , so is it the next Klondike so to say  or “Internet Garbage” as some people claim?

D.G.: The value of bitcoin is based on perception of what it’s worth and competition between buyers that can drive the price higher.

I do not think it is “internet garbage “because of the broadening market acceptance of cryptocurrency.

Bitcoin is being recognized as legal tender by some governments.  For example, Japan recognized bitcoin as legal tender in April 2017.  There are number of countries that are using cryptocurrencies as a tool to try to solve economic issues.  For example: Venezuelan President Nicolás Maduro announced the creation of a virtual currency in an effort to ease the country’s economic crisis.  Some countries are considering a bitcoin based crude oil transactions to eliminate potential control of US dollars used crude oil transactions.  Ecuador has its own digital currency.  The US music industry, IMF, Argentina, Zimbawave are considering using bitcoin or another cryptocurrency. Israel Diamond Exchange is launching diamond-backed cryptocurrency.  Palestine considering bitcoin and other cryptocurrencies

I do have concerns about trading in the bitcoin cash market.  Bitcoin is still considered a very small market compared to the currency market and the question remains can it handle the volume that could come with increased institutional participation because of the introduction of bitcoin derivatives.  Recently, some bitcoin exchanges struggled under higher volumes. Bitcoin is illegal in some countries, such as Iceland.  Indonesia and Bangladesh have banned its use as a payment tool.  I do not think bitcoin or the concept of crypto current will be going away anytime soon.

Dan Gramza is President of Gramza Capital Management Inc. and DMG Advisors, LLC.  He provides daily market updates from around the globe on subjects ranging from the Nasdaq and currencies to crude oil and grains at dangramza.com.