Bitcoin dips a toe into the mainstream
The status of bitcoin as a legitimate financial asset may be rising even faster than its price. Just last month, Jamie Dimon, the chief executive officer of JPMorgan Chase, said that bitcoin was A) a fraud and B) something his bank would never touch. Dimon said he would personally fire anyone who deigned to trade it. CME group president Bryan Durkin, also in September, told Bloomberg Television that he didn’t “see us going forward with a futures contract in the very near future”.
The financial establishment’s vision for bitcoin, though, has proved to be extremely near-sighted. On Tuesday, the CME Group announced that it plans to list bitcoin futures contracts by the end of the year. The development is positive. Right now, if investors want to bet on the price of bitcoin, the only real way to do it is to buy bitcoin. That’s not only potentially inflating the price of bitcoin but also making it harder to determine the currency’s true value. One expert estimates that nearly a third of the transactions in the currency could just be traders swapping it, making it look more used as a medium of exchange than it truly is.
Second, bitcoin exchanges have been plagued by hacks. CME’s bitcoin contract will trade and settle, somewhat ironically, in dollars. The virtue of that is traders can bet on the price of bitcoin without the fear of the bitcoins in their accounts being hacked. And the CME trading venue removes counterparty risk as well. That should bring in more traders who are sceptical of the currency and could keep any bubble in check.
There is a risk, of course, that the opposite could happen. If bullish bitcoin investors flood into the CME’s new contracts and push their price up, that could further inflate the value of actual bitcoins. Derivatives have been known to add air to bubbles. See the housing market. The price of bitcoin surged on the CME news.
But that’s no reason for CME to look the other way. Bitcoin is most likely here to stay. Even excluding bitcoin trading, $350 million in transactions have been completed on average each day for the past six months, and that number has been more like $800 million recently. People who transact in bitcoins will want a place to hedge the currency. And bitcoins are going to get traded. Goldman Sachs Group Inc. said that it is looking into it, and other banks could follow. Without the CME, banks like Goldman may create opaque contracts to trade the currency. With the CME, investors will have a much clearer and safer view of bitcoin, just like any other grown-up asset. Bloomberg Gadfly
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