Exchanges, Investment Advisors and Technology Providers Share Expertise on Crypto Derivatives
“Cryptocurrencies change the trust model,” said Kevin Darby, Managing Partner of Blue Trading Systems. “Most financial systems depend on a trusted third party but this allows for transactions between parties that minimally trust each other.”
Leveraging industry experts for an educational seminar, the Futures Industry Association (FIA) held a panel looking at how the derivatives industry has adapted to cryptocurrencies since the launch of bitcoin futures at the end of 2017. Kevin Darby sat on the panel with John Tornatore, Global Head of Crypto at Cboe, Giovanni Vicioso, Senior Director of Equity Products at CME Group and our own Chris Hehmeyer of Hehmeyer Trading + Investments.
Moderated by Greg Wood, Senior VP of Global Industry Operations and Technology at FIA the conversation kicked off by polling the audience, which consisted of exchange members, technology providers, proprietary traders and institutional investors. A majority of the attendees had in fact invested in cryptocurrencies.
The panelists gave a quick definition of cryptocurrencies and even cited this parody video for beginners.
“It is a convention carried out over a group of computers, a unit of account, merged with a consensus mechanism,” said Darby.
Hehmeyer agreed with Darby’s definition and emphasized its decentralized nature.
“There is a consensus mechanism and nodes around the planet that confirm the consensus or transaction. This creates a permanent record that can’t be altered,” he said. “Before we had trusted third parties but now the technology enables this consensus of a transaction and we have this asset that can be distributed globally.”
It wasn’t all agreements on the panel, however.
There was a also a little back and forth between Cboe Global Markets and CME Group, but it is without question that Cboe launched the first futures contract on Bitcoin with CME following suit.
Both exchanges initially had larger contracts in mind with Cboe first introducing a product with 10 bitcoin to 1 futures contract. However, after discussions with market participants, Cboe reduced the contract to a 1:1 ratio. CME also reduced their contract size down to a 10:5 ratio when the price of bitcoin was on the rise.
The Exchanges also talked about some of the players in the bitcoin futures market and how at first it was the market makers that could take on this type of risk. Now they are seeing more institutional flow as the industry gets more comfortable with the idea of contracts on cryptocurrencies, as well as seeing miners that hold bitcoin having a real need for hedging opportunities.
There are also other entrants to these markets that are waiting on the sidelines. The Exchanges also see the early adapters on the West Coast who hold bitcoin but don’t know enough about futures contracts. The panelists stressed the need for more education.
Chris Hehmeyer believes that the Exchanges brought a lot of legitimacy to the cryptocurrency markets but also a lot of criticism in terms of margins and risks posed by something new.
“It takes time for the public to accept something new,” said Hehmeyer. “Regulators are going to want to see us move in a safe and stable manner. If we indeed see a slow and steady growth of trading of these assets on the exchanges, regulators will be innovative in this area.”
The panelists believe that the Commodity Futures Trading Commission has been very progressive and forward thinking in terms of bringing these products to the market. Compared to the Securities and Exchange Commission, who has had more of a struggle due to deciding if certain tokens are deemed securities.
Looking forward, the Exchanges need to see more developments and liquidity in the bitcoin market but have plans to launch contracts on other coins in the future.
Hehmeyer also touched upon what we can expect in terms of market volatility.
“Like any technology curves you have this run up of euphoria and then a crash where you lose about 80% of the value, maybe we have lost about 75%,” he said. “There might be a lot of people holding Bitcoin that hope we hit the bottom but we need to shake off a little more fluff before we have a long progression and acceptance of this technology. You don’t know when the capitulation is going to happen until it happens….”
There weren’t many curve ball questions asked, maybe due to what some people may think is an outrageous panel topic in itself, however there was a baseball analogy.
One panelist said, “we aren’t in the first inning, the first pitch hasn’t even been thrown out yet. People are just entering the stadium.”