FIA Crypto: The Futures Influence on the Crypto Markets

The Futures Industry Association (FIA) held a panel discussion on September 11 at the Union League Club covering the basics of cryptocurrencies, what impact the futures industry has had on the space and how regulators have responded to the new asset class.  

Moderated by Greg Wood, Senior VP of Global Industry Operations and Technology at FIA; the panel included Kevin Darby, Managing Partner of Blue Trading Systems, Chris Hehmeyer, CEO and Founder of Hehmeyer Trading + Investments, John Tornatore, Global Head of Crypto at Cboe Global Markets and Giovanni Vicioso, Senior Director of Equity Products at CME Group.

Covering the Basics

While cryptocurrencies and blockchain have been around for over a decade, it was only when the Exchanges launched futures contracts on Bitcoin that the industry had to take a crash course on what Cboe and CME Group were offering.

“Cryptocurrencies are a convention carried out over a group of computers, a unit of account, merged with a consensus mechanism, “ said Kevin Darby, trying to explain what a cryptocurrency is exactly.  

For beginners, the panelists recommended the book The Truth Machine by Michael Casey.

“It is the best book I have ever read on the topic because he goes into this concept of decentralized technologies,” said Chris Hehmeyer.

Cryptocurrencies and the technology behind it, Blockchain’s decentralized nature, changes the trust model.

“Blockchain transactions change the trust model.  Most financial systems depend on a trusted third party but this allows for transactions with parties that minimally trust each other,” said Darby.

The panelists also touched upon the work that the FIA has done to get information to their members about cryptocurrencies and blockchain.  Darby is a member of the FIA’s cryptocurrency study group.

“The Exchanges forced industry participants to wrap their heads around cryptocurrencies and the FIA responded by forming a valuable information sharing group,” Darby said.

The Exchanges’ Influence on Crypto

With Cboe launching the first bitcoin futures contract and CME following shortly after, at the end of 2017, the Exchanges talked a little bit about how their offering has since changed.

Cboe inherited a relationship with the Winklevoss Twins, who run Gemini Trust, when they acquired BATS Global Markets.  It was brought up that when Cboe first introduced specs for the bitcoin contract it was 10 bitcoin to 1 futures contract.  However, after initial discussions with market participants they changed the contract specs to 1:1.

Cboe initially saw a lot of market makers trade bitcoin futures and had 11 FCMs step up to clear the products when they first launched.  As the product evolved, a lot of the question marks went away and the contracts became more of an opportunity. Besides U.S. participants, the exchange has experienced a variety of global players including proprietary trading firms and institutional investors from Israel, Europe and Asia.

CME also made changes to their initial offering dropping the contract size down from 10:5 when the price of bitcoin was on the rise.  The CME has seen a lot of interest from traditional derivatives players but also miners who hold bitcoin and have a real need for hedging opportunities.

The CME made note that they saw the first Exchange for Physical (EFP) trade occur in early July, which proves new traders are coming into the markets. They have also seen about 80% open interest rolling from month to month and have about 40 large open interest holders. The CME’s ratio enables 30,000 bitcoin traded per contract, which is competitive compared to spot exchanges.

All the panelists agreed that derivatives contracts brought legitimacy to the crypto market but also brought criticism, due to margins and risks posed by something new.

Hehmeyer compared the launch of cryptocurrency futures to when Treasury contracts were first introduced to the derivatives market.

“We traded 2000 contracts in a day and it was exciting but it took time for the public to accept it,” he said.

Regulating a New Asset Class

The panelists also believe that the Commodity Futures Trading Commission (CFTC) has done a great job of getting these products to the market, calling them progressive and innovative.  This is compared to the Securities and Exchange Commission (SEC), who has struggled more because they have to decide if certain tokens are deemed securities.

While there are fraudsters in this space, the panelists believe education and regulation will combat the negative news surrounding cryptocurrencies.  

In fact, Darby noted that all the fraud and manipulation that has happened in cryptocurrencies took place on surrounding technologies, not the actual Blockchain technology.

In closing, the panelists took a stab at how to value a digital currency.

“Bitcoin is more like digital gold than it is an actual currency,” said Hehmeyer.

With the panelists agreeing that gold only has a value because we give it a value, Kevin Darby responded by bringing the conversation full circle, “Cryptocurrencies are a consensus mechanism.”

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