What the news in the cryptocurrency world after the fourth week of Bitcoin futures trading?
The View from LaSalle Street
Here we are on Friday, January 12, 2018, basically ending the fourth week of trading BTC futures – but the reality is that this concludes just the first full open-for-business week of trading, and we can now glean a few bits of information now that may provide a bit of a roadmap to where this new asset class is headed.
Cryptocurrencies has had an interesting week on the public stage, to be sure. In my most notable development (all over my LinkedIn network and Twitter feed ((@chicagobill2)), the story talked about with the greatest attention seemed to be the fact that Goldman Sachs has entered the business of clearing bitcoin futures trades for its clients. Understanding the lay of the Investment Bank land as we do, this undoubtedly means BIG MONEY as Goldie, at the very least: builds derivatives, begins the process of opening a serious hedge fund, morphs a prop trading desk into high-end Crypto, designs an associated fee structure and then starts soliciting high value clients to participate on the capital side. This is precisely what the industry needs at this moment in its growth cycle.
Well, we now find ourselves in a regulatory quandary, for no one really knows just where digital currency is going to land vis-à-vis oversight, and with Goldie opening its digital wallets, the Feds have exactly what they need to determine which of their kind will be enforcing and collecting the vig on whatever regulations will be written, at whatever time they are finally drafted.
Let me explain, by quoting myself in a LinkedIn conversation. The following was my response to a friend citing Jamie Dimon (JP Morgan Chase) “pulling a 360-degree about-face” stating that bitcoin has now become a “portfolio asset comparable to Gold”. My friend in this case (an investor/trader of note), understands how an institution like GS or JPM can benefit from spreads, volatility, range-traded option plays, and “taking the other side” from the prop desk perspective. My reply:
“I agree. Its value and market cap make it a self-fulfilling prophecy that means Investment Banks will simply invent derivatives to protect and pad their rear ends. This is way beyond simple buy and hold nonsense — you can bet the big spread plays and arbitrage will be their bread and butter, along with selling whatever derivatives they come up with.
The only wild card will be what chips fall where on the Regulatory side, and importantly, fee restrictions. There could be another Glass-Steagall kind of banking restriction on the way too. Remember, the Blockchain devotees want to “currency” Crypto, and I guarantee Central Banks will want to Chinese firewall it until they can apply some universal “standards” to it. Gonna be a mess mainstreaming virtual Coinage but it will happen. Millions of Chinese can’t be wrong…Right??”
My friend then went further because the Coders would have us believe Crypto replaces Fiat currency at some point. My response further underscored that the creation of the marketplace currently is in its infancy, and NOT NEARLY settled authority. Why is that important he wondered?…
“If Crypto was actual currency, then it would ALL be standardized under the same Regulatory umbrella, and the NFA would write up a myriad of restrictions. But the government is proceeding slowly, and the SEC is holding serve, with only the two sanctioned Bitcoin futures contracts in play, at this point.
The Regulators will be happy to sit in with the big Banks as they get the lay of the land, and build infrastructure designed to be able to control, as best they can, the Crypto derivatives market. This is how the agencies have always learned about markets they otherwise know absolutely nothing about. They did this with Forex currency markets 20 years ago. I sat in on meetings to that effect when working with legitimate futures companies.
The days of buying and holding whatever shiny object the code writers come up with are numbered because whatever intrinsic value digital currencies have will either be self-diluting (how many different “coins” can market demand sustain) or tamed (code-broken, deconstructed, and “understood”) via derivative creation and particularly regulation and the inevitable, bottom-line: taxation.”
Thus, begins the funky legitimization of the Crypto marketplace. The nerves being generated by the entrée into tradable, regulated, markets are understandable, yet is a natural by-product of it becoming mainstream. We’ll continue to keep a keen eye on the who/what/why/where of this market, and hopefully explain to you traders exactly what you need to know (and perhaps what you DON’T really need) to successfully jump into this marketplace.
Next, we will examine why the Bears are seemingly in charge of Bitcoin now that there is a future’s derivative available, where “cash” coinage continues to explode. Stay tuned ….