How many hedge funders have watched in vain over the last year as bitcoin topped itself again and again, rising from a few hundred to well over $6,000 today? How many hours did junior-level analysts waste on tome-length bitcoin investment theses that would sit unopened for months on some manager's desk before being put to use as a doorstop? How many bitcoin algos have quant firms' resident crypto geeks written just for fun, outside of company time, only for a vicarious taste of that blockchain juju?
No one can know for sure. Suffice to say there's a mass of silently suffering hedgies out there yearning for nothing more than a few measly bps of their firms' portfolios to be devoted to bitcoin. But one obstacle more than any has made it such a tough sell. Beyond the obvious quibbles – that bitcoin is almost universally shunned by banks, near-synonymous with bubble, reminiscent of a pyramid scheme, and pervaded by fraud and manipulation – the only real drawback has been that unless you're cool with shady exchanges domiciled in weird Balkan states you've never heard of, bitcoin couldn't be reliably hedged. Until now:
"Given increasing client interest in the evolving cryptocurrency markets, we have decided to introduce a bitcoin futures contract," said Terry Duffy, CME Group Chairman and Chief Executive Officer. "As the world's largest regulated FX marketplace, CME Group is the natural home for this new vehicle that will provide investors with transparency, price discovery and risk transfer capabilities."
According to the press release, CME is looking to launch sometime in Q4, joining CBOE in the race to start hawking bitcoin-related products. The data underlying the futures will come from Gemini Trust, the Winklevoss twins' exchange. Bitcoin went vertical on the news.
And for good reason. Not only does this mean hedge funds can now blithely launch themselves into the crypto orgy with at least a little peace of mind, but they can do so purely on the basis of cash-settled futures that involve no underlying transfer of actual bitcoins, a process that remains rife with inefficiencies and risks like being hacked.
Of course, there are already plenty of hedge funds playing around in the crypto space right now. Bill Miller, for instance, just launched a fund that's up 72.5 percent this year in part because he plowed a third of its capital into bitcoin. Still, most of the bitcoin-happy hedge funds are fledgling firms and niche players. We've yet to see, say, Bill Ackman say fuck it all and go long bitcoin, or David Einhorn finally embrace his nerd id. The big guys need institutional cover for that kind of move, and CME is just the organization to provide it.
And it's more green from there. Odds are that increasing institutional buy-in will elicit more people to plow into physical bitcoin, and a virtuous cycle will unfold. Long-denied bitcoin ETFs will be all but inevitable once there exists a regulated futures market under the aegis of the distinguished CME Group. Bitcoin for your pension! Bitcoin for your IRA! Bitcoin for your kid's college fund!
The only thing standing in the way now is a regulatory rubber stamp. And we don't expect much resistance from Christopher “Bitcoin Is In The National Interest” Giancarlo's CFTC, which already gave the green light to small-fish LedgerX for bitcoin derivatives.
If bitcoin is a bubble, it's still got a lot of inflating to do.