CME to launch futures contract on soaring bitcoin
With the price of bitcoin soaring, the CME Group announced plans Tuesday to launch a futures contract on the digital currency by year’s end, offering a trading platform for investors — and perhaps some legitimacy for skeptics.
The new contract, pending regulatory approval, will be based on the daily bitcoin reference rate, which topped $6,400 Tuesday and is up 500 percent for the year, drawing increasing interest from traders, according to Chicago-based CME, the world’s leading derivatives marketplace.
“CME Group is the natural home for this new vehicle that will provide investors with transparency, price discovery and risk transfer capabilities,” CME Chairman and CEO Terry Duffy said in a news release.
While the bitcoin contract could provide a robust trading platform for investors, it may not do much to turn the arcane digital concept — birthed less than a decade ago by anonymous computer developers — into a widely used currency, experts say.
“It makes complete sense from the perspective of the pricing game. It’s a traders’ game right now,” said Aswath Damodaran, finance professor at New York University’s Stern School of Business. “It does absolutely nothing in advancing bitcoin’s cause as a digital currency.”
Created in 2009, bitcoin is a peer-to-peer digital payment network with no central bank. Bitcoins are created by “mining,” where individuals are rewarded for their services to their network. Over time, a maximum of 21 million bitcoins will be put into circulation.
The “artificial scarcity” model is great for trading but not so much for adoption as a global currency, Damodaran said.
“What they saw when they originally created bitcoin was gold for the millennials,” he said. “You can’t create a currency that’s a crisis currency for paranoid geeks and expect it to become a widely used currency for transactions.”
In November 2016, the CME and London-based Crypto Facilities introduced the bitcoin reference rate, which aggregates trading from major bitcoin spot exchanges to calculate a daily price. This year, bitcoin pricing has risen from less than $1,000 to a new intraday high Tuesday of $6,415.
The bitcoin market capitalization has grown to more than $100 billion.
“The reference rate as part of a futures contract … allows people to manage their risk as the bitcoin market develops,” said Laurie Bischel, a CME spokeswoman.
Given the pricing volatility of bitcoin, the futures contract will offer an opportunity for traders to speculate on continued appreciation. In July, Ronnie Moas, founder of Standpoint Research, set a $50,000 price target on bitcoin by 2027.
“That’s my conservative target,” Moas said. “I think you could hit $100,000 by five years from now.”
Moas predicted bitcoin and cryptocurrency will replace the traditional banking system and supplant gold as an investment vehicle. He said the CME futures contract is “a stamp of approval” that will open the door to other trading platforms such as an exchange traded fund, which he said would encourage broader investment in bitcoin.
“The floodgates will open,” Moas said. “The price of bitcoin will double overnight when that happens. It is not easy for the average person to buy bitcoin right now.”
Others are not so bullish, including legendary investor Warren Buffett, who recently called bitcoin a “real bubble.”
The same volatility that makes bitcoin attractive to investors may be scaring away some businesses contemplating its use as actual currency, NYU’s Damodaran said.
“What makes it so attractive as a speculative investment makes it awful as a currency,” he said. “If you’re a shopkeeper, you don’t want to put your prices up in bitcoin — you’ll have to keep changing those prices a dozen times every day.”
Damodaran said bitcoin will have to stabilize and become more “boring” to gain widespread adoption. He also expressed misgivings about bitcoin as an investment alternative to gold.
“At least if you trade gold, you end up with something shiny at the end that you can hold on to,” Damodaran said. “If bitcoin doesn’t become a currency, what the heck do you have five years from now?”
Written by Chicargo Tribune
Bitcoin’s $6,400 Price Tag Explained By Initial Coin Offering Craze
How can a single Bitcoin, which was trading at only a few hundred dollars two years ago, now be trading at over $6,400? Is there a big Bitcoin bubble? Are skeptics from Russian President Vladimir Putin to JP Morgan Chase CEO Jamie Dimon correct that Bitcoin is a fraud and or pyramid scheme?
Those are important queries, but the biggest boost to Bitcoin actually derives from something not discussed, and a rather unlikely source: its competition — other digital currencies and their related Initial Coin Offering (ICOs).
Hundreds of digital currencies have raised funds through ICOs. Like their regulated IPO (Initial Public Offering) cousins, ICOs seek to raise money to build a digital token and the ecosystem surrounding it.
Digital lake of liquidity
Through the first three quarters of this year alone, in excess of $1.2 billion has been raised for over 100 ICOs. When the funds are actually invested in the ICOs, the currency used is — by and large — Bitcoin. Therefore, Bitcoin serves as the predominant liquid asset behind all these ICOs. And of all the cryptocurrencies out there, Bitcoin is the most widely traded and can easily be converted into cash. As a result, the price of Bitcoin has continued to grow exponentially. A similar, but less pronounced phenomena, has occurred with Ether, the second most traded digital currency after Bitcoin. (Ether itself, raised $18 million for their ICO in 2014, much of it in Bitcoin.)
Not only are most ICOs funded using Bitcoin, they continue to use Bitcoin and the “Digital Lake of Liquidity” in their transactions once actual digital currencies or coins are up and running. Don’t get me wrong, the rubber has not hit the road for many of these ICOs, and the majority of actual currencies have not entered circulation. Unfortunately for investors, they may never do so and there are scant regulations to protect investors from such a circumstance. That said, for those ICOs that do have an actual digital currency in circulation (and there are over 100 of them) they also use the “Digital Lake of Liquidity” to accept funds and to perform payout services. When they do so, they primarily use Bitcoin.
These other currencies trade their denominations with Bitcoin not only because Bitcoins are so widely held by so many investors, but because of the volume of trading on digital currency exchanges. Such large volume is part and parcel to the “Digital Lake of Liquidity,” which when trading affords traders the best-executed prices (since there is so much competition within the marketplace). There are currently more than 1,100 other currencies. Not all of them participate in trade.
The bottom line is that as the digital currency universe continues to expand to accommodate new currencies, Bitcoin (and to a lesser extent Ether) prices will likely continue to increase.
It is difficult, if not impossible, to break down and quantify this liquidity phenomena. In large part, the difficulty is due to the lack of regulation over ICOs and digital currencies in the U.S. and abroad. There is little reporting or transparency to inform investors of what is taking place.
While the “Digital Lake of Liquidity” phenomena is not something commonly discussed among digital currency enthusiasts, or anyone else, it certainly does not explain the recent volatility of Bitcoin, nor other concerns, such as the following;
A pyramid shape?
There’s little doubt that if the originators of the digital currency intended Bitcoin to be a fraud, the mechanics of it would work out wonderfully. New investors (including ICO investors) could keep the endeavour afloat as older investors cash out. As long as new money keeps coming in and redemptions aren’t excessive, it could operate like a traditional pyramid ponzi scam.
At the same time, there is certainly no evidence that when Bitcoin was established there was any intent to be involved in a fraud. Heck, we don’t even know the inventor(s)!
Furthermore, Bitcoin and other digital currencies are increasingly being used in commerce. If an individual purchases or invests in such a currency and then actually buys something — a hotel room or a car, for example — it is certainly something of value. Nobody is getting ripped off there. That’s not a fraud. That’s not a ponzi scheme.
Bitcoin isn’t tied to anything tangible or real we can touch and feel. That fact further decreases price stability. If a digital currency were to be tied to a tangible asset, it would even out price fluctuations, not to mention open up the possibility of backing up investor claims. This innovation in digital currency is something that has been discussed, and tried, but not put into popular practical use.
Recent wild price swings for Bitcoin are suspect. Amid negative news, including but not limited to ICO and digital currency bans in China, South Korea and Russia, prices have — after initially dropping — soared to record highs. Such should be a clarion call for a deep dive look from financial enforcement officials to determine if prices have been manipulated.
Bitcoin and the digital currency ecosystem have been fast forwarding at incredible speeds. A week of watching what’s taking place might seems equal to several months in other markets.
I don’t think any of the developers of these current currencies or the related exchange trading platforms have it quite right. That said, the digital ecosystem isn’t going away. The extent of its continued rapid growth is ultimately tied to greater innovation coupled with the adoption of basic rudimentary regulations for investor protections.
To date, amid all the incredible innovations, there are no existing digital white knights. At some point, however, some will get it right.
Written by Forbes
Understanding Segwit2x: Why Bitcoin’s Next Fork Might Not Mean Free Money
Bitcoin is gearing up for what could be the biggest (and least understood) change to its software to date.
Often called simply a “digital currency,” bitcoin is best viewed as a protocol (a set of code) that delivers data (in this case bitcoins) in defined quantities (called blocks) that are then stored in a sequence (called a blockchain) on a distributed set of global computers. Bitcoin is decentralized – in that many people help make the network function, and in choosing to run its software, users all agree to abide by the same rules to keep it operational.
It’s these qualities that make the proposed change particularly divisive.
Called Segwit2x, the plan calls for a very specific fork (or a change to bitcoin’s rules), one that would make certain rules valid that weren’t valid before. Specifically, Segwit2x would change the size of the blocks passed regularly around the network and stored in the blockchain from 1 MB to 2 MB.
Some users think this is a good idea, others don’t.
But to begin, it’s important to note how this fork differs from others. Coming on the heels of the bitcoin cash and bitcoin gold forks, bitcoin users might be accustomed to certain outcomes – ones that might not be guaranteed in the case of Segwit2x.
With bitcoin cash and bitcoin gold, for example, bitcoin users could have paid little to no attention and it wouldn’t have impacted their transactions. If you held bitcoin on certain exchanges (or your own wallet), you received new cryptocurrency.
This smooth outcome, however, isn’t guaranteed with Segwit2x. Complicating matters is that in many ways, Segwit2x sounds (and is) similar to other bitcoin forks.
Like other recent forks, Segwit2x is:
- An alternative software – A modification of the bitcoin software run by network participants and that enforces the protocol rules. In this case, Segwit2x’s code is called BTC1.
- An attempt to increase the block size – Most forks focus on one specific rule of the network (block size), despite other possible optimizations that could lead to capacity boosts.
- A hard fork – Anyone whose software is not upgraded to the new rules will no longer be a part of the network.
It’s the differences, however, that stand out this time around.
First and foremost, whereas bitcoin cash developers appeared content to create a new blockchain (with new rules), Segwit2x’s goal is to keep all bitcoin’s existing users on one blockchain.
In this way, Segwit2x could have different outcomes.
- Bitcoin’s rules change. Most (or all) miners upgrade their software. The bitcoin blockchain continues to function but features larger blocks. Segwit2x’s rules become the rules of bitcoin.
- Two bitcoins are created. Only some miners upgrade their software. This creates two blockchains – a so-called “legacy” bitcoin, and a “Segwit2x” bitcoin, both with different rules and unique cryptocurrencies.
- Bitcoin’s rules do not change. No significant miners run the new software, and the network continues to run the current rules.
For or against?
However, it’s the second outcome that might be of most concern to users, given it appears possible.
The reason is that those who support the change, and those who do not, both appear to have support from different parts of the community. In short, while Segwit2x claims to have a super-majority of miners and exchanges, it can’t be said that 100% of network users support just one side.
Segwit2x draws the most support from:
- Miners – The network users who run hardware necessary to secure the blockchain and profit from bitcoin’s block rewards.
- Startups – The businesses that profit by providing a service to bitcoin users, allowing them to spend, store or purchase cryptocurrencies.
- Bitcoin should be digital money. It should compete with the U.S. dollar or other fiat currencies, and thus, a priority should be put on its use as a means of exchange.
- Competitors are gaining because of bitcoin’s inaction. They believe protocols other than bitcoin have continued to gain traction because they’re useful for payments; those protocols are currently capturing value that otherwise would have been bitcoin’s.
- Existing upgrades aren’t enough. They say the addition of code to the blockchain in August hasn’t brought about the capacity increases promised.
Other groups oppose this thinking.
- Developers – The voluntary group that maintains bitcoin’s code; this group includes a number of people that have arguably worked on the bitcoin protocol the longest.
- Node operators – The bitcoin users who store copies of the blockchain’s full transaction history (with bigger blocks, they will see rising storage costs).
- Bitcoin is a store of value, not a payment network. Though, they seem to think the latter is possible in the future as the technology advances.
- Segwit2x is risky. Should bitcoin break or fail to deliver transactions, they believe this could undermine the project as a whole.
- Segwit2x gives miners and business too much power. They argue that this effectively centralizes decision-making for a decentralized network, undermining bitcoin’s strongest value proposition.
How likely is a split?
For now, it’s perhaps too early to say for sure. But with that in mind, we do have some indications given the mechanics of how Segwit2x has been coded.
This is because:
- Segwit2x uses BIP 9 activation. This means that the rule change is governed by the percentage of miners running the new code.
- Miners mostly support Segwit2x. 1Hash, Bitfury, Bitmain, Bixin, BTC.com, BTCC, BTC.Top and ViaBTC all signed the original agreement, reached in May.
On paper, the plan boasts roughly 80% of the network’s miners as signatories, a group some believe is big enough to switch the majority the network over to the Segwit2x chain, and quickly (for fear of being left on an unprofitable software).
The reasoning here goes like this – the Segwit2x chain will quickly accumulate the most mining power, making the original bitcoin unprofitable (or unmanagable) to mine, and ensuring a total migration.
Yet, that’s not to say all these miners will eventually run the code.
While more complex, the reasons why include:
- Many back bitcoin cash. Bitcoin’s China-based community tends to be more invested in this bitcoin alternative, which already increases block size to 8 MB.
- Miners aren’t likely to act unilaterally. Signatories like ViaBTC and BTC.Top are mining pools that primarily sell software subscriptions to other miners. This means that they will likely give users the option to mine Segwit2x, but all of their users aren’t guaranteed to switch over.
- Some miners aren’t supporting. This includes F2pool (which governs 5.6 percent of the network) and Slushpool (responsible for 7.3 percent), both of whom have said (with varying degrees of certainty) that they won’t run the code.
Also of importance here will be the perceived value of a Segwit2x cryptocurrency.
Already, exchanges are experimenting by listing a version of the coin – one that lives only on their order books – as a way to test the value.
At press time, the value of the new version of bitcoin was estimated at just over $1,000, double the price of bitcoin cash ($450) and much higher than bitcoin gold ($130).
When will all this occur?
But while there remain many ifs, one thing we do know is the fork will occur on or around Nov. 16.
However, an exact date can’t be pinned down. This is because the change will be enacted at a specific block (number 494,784), at which time miners will be able to run the new software.
Still, those involved with the project are adamant that it is moving forward, with the project’s lead developer stating just last week that the updated code will be released based on the mid-November plan.
Image by ShutterStock
Witten By CoinDesk
Swaziland Central Bank Governor: It’s ‘Not Wise’ to Dismiss Cryptocurrency
The central bank of the Kingdom of Swaziland is researching cryptocurrencies, according to its governor.
Speaking at an economic forum last week, Central Bank of Swaziland (CBS) chief Majozi Sithole struck an optimistic note about the technology, according to a report from the Swazi Observer.
While he didn’t issue any definitive statements on the topic, Sithole indicated that its a topic of study at the central bank, and that officials there don’t want to impede any possible financial innovation.
“It may not be wise to dismiss virtual currencies and as the CBS we are learning and we want to accept and support innovation. If this is innovation, we do not want to stifle it. We want to learn more about it,” he told event attendees.
And while Sithole’s comments represent the central bank’s most significant comments on cryptocurrency to date, they aren’t the first time that the institution has publicly signaled its interest.
In an internal news circular published in August, Lindokuhle Sithole Shabangu, the central bank’s senior communications officer, offered a brief overview of the technology and highlighted the research going on in this area.
“In essence, the Central Bank, in line with its mandate to issue and redeem currency as well as to promote safe and accessible payment systems, continues to closely monitor developments in the financial services industry with a view to ensure that the regulatory framework remains relevant and appropriate,” she wrote.
Swaziland map and pin image via Shutterstock
Written by CoinDesk