Monday, December 11, 2017

Bitcoin's Big Bang?

Rob Urban, Camila Russo and Yuji Nakamura of Bloomberg report, Two trading halts, 26% gain: Bitcoin hits Wall Street with a bang:
Bitcoin has landed on Wall Street with a bang.

Futures on the world’s most popular cryptocurrency surged as much as 26 per cent from the opening price in their debut session on Cboe Global Markets Inc.’s exchange, triggering two temporary trading halts designed to calm the market. Initial volume exceeded dealers’ expectations, while traffic on Cboe’s website was so heavy that it caused delays and temporary outages. The website’s problems had no impact on trading systems, Cboe said.

“It is rare that you see something more volatile than bitcoin, but we found it: bitcoin futures,” said Zennon Kapron, managing director of Shanghai-based consulting firm Kapronasia.


The launch of futures on a regulated exchange is a watershed for bitcoin, whose surge this year has captivated everyone from mom-and-pop speculators to Wall Street trading firms. The Cboe contracts, soon to be followed by similar offerings from CME Group Inc. and Nasdaq Inc., should make it easier for mainstream investors to bet on the cryptocurrency’s rise or fall.

Bitcoin wagers have until now been mostly limited to venues with little or no oversight, deterring institutional money managers and exposing some users to the risk of hacks and market breakdowns.

Bitcoin futures expiring in January climbed to US$17,540 as of 11:29 a.m. in London from an opening level of US$15,000, on 2,798 contracts traded. The spot price climbed 6.4 per cent to US$16,647 from the Friday 5 p.m. close in New York, according to the composite price on Bloomberg.

The roughly US$900 difference reflects not only the novelty of the asset but also the difficulty of using the cash-settled futures to trade against the spot, strategists said.

“In a normal, functioning market, good old arbitrage would settle this,” Ole Hansen, head of commodity strategy at Saxo Bank A/S in Hellerup, Denmark, said by email. “If they were deliverable you could arbitrage the life out of it.”

Proponents of regulated bitcoin derivatives say the contracts will increase market transparency and boost liquidity, but skeptics abound. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon has called bitcoin a “fraud,” while China’s government has cracked down on cryptocurrency exchanges this year. The Futures Industry Association — a group of major banks, brokers and traders — said this month that contracts in the U.S. were rushed without enough consideration of the risks.


So far though, trading has kicked off without any major hiccups.

Dealers said volume was high for a new contract, even though it was tiny relative to more established futures. And the trading halts took effect just as Cboe had outlined in its rules. Transactions stopped for two minutes after a 10 per cent gain from the opening price, and for five minutes after a 20 per cent jump. Another five-minute halt will take effect if the rally extends to 30 per cent, Cboe said in a notice on its website.

“It was pretty easy to trade,” Joe Van Hecke, managing partner at Chicago-based Grace Hall Trading LLC, said in a telephone interview from Charlotte, North Carolina. “I think you’ll see a robust market as time plays out.” For now, Cboe futures account for a tiny slice of the world’s bitcoin-related bets. The notional value of contracts traded in the first eight hours totalled about US$40 million. Globally, about US$1.1 billion of bitcoin traded against the U.S. dollar during the same period, according to Cryptocompare.com.


Some people who would like to trade futures are having a hard time accessing the market because not all brokers are supporting it initially, said Garrett See, chief executive officer of DV Chain. Participation may also be limited because of higher capital requirements and tighter risk limits, See said.

“We’re in the early stages here, and there’s not enough professional liquidity from the big market makers who can provide depth and hold in the movements,” said Stephen Innes, head of trading for Asia Pacific at Oanda Corp. “It’s going to be a learning curve.”

It’s been painful for investors stuck on the sidelines. This year alone, bitcoin is up more than 17-fold. The surge has been driven largely by demand from individuals, with technical obstacles keeping out most big money managers like mutual funds.

The new derivatives contracts should thrust bitcoin more squarely into the realm of regulators, banks and institutional investors. Both Cboe and CME on Dec. 1 got permission to offer the contracts after pledging to the U.S. Commodity Futures Trading Commission that the products don’t run afoul of the law, in a process called self-certification.

Not everyone is happy with the expedited roll out. Exchanges failed to get enough feedback from market participants on margin levels, trading limits, stress tests and clearing, the Futures Industry Association said this month. In November, Thomas Peterffy, the billionaire chairman of Interactive Brokers Group Inc., wrote an open letter to CFTC Chairman J. Christopher Giancarlo, arguing that bitcoin’s large price swings mean its futures contracts shouldn’t be allowed on platforms that clear other derivatives.

Still, Interactive Brokers is offering its customers access to the futures, with greater restrictions. The firm’s clients won’t be able to go short, and Interactive’s margin requirement, or how much investors have to set aside as collateral, will be at least 50 per cent. That’s a stricter threshold than both Cboe’s and CME’s.

The start of futures trading is an important milestone for bitcoin’s shift from the fringes of finance toward the mainstream, but it could be some time before the cryptocurrency becomes a key part of investor portfolios — if it ever does.

“You never say never,” David Riley, who helps oversee US$57 billion as head of credit strategy at BlueBay Asset Management LLP in London, said in an interview on Bloomberg Television. “But I do think we’re quite some way from making cryptocurrencies even a relatively small part of some of the funds we manage at the moment.”
Claire Brownell of the National Post also reports, Big changes coming as bitcoin futures trading, ETFs launch:
Cryptocurrency fever was already rampant when Evolve Funds Group Inc. on Sept. 22 announced it was the first company to file a prospectus to offer a Canadian bitcoin exchange-traded fund. Since then, investor frenzy has reached a fever pitch.

Over the past two and a half months, bitcoin has more than quadrupled in price. Investors have poured US$1 billion into initial coin offerings, where startups offer cryptocurrencies in exchange for capital. Even digital cats — yes, digital cats — are being bought and sold for six-figure sums on the blockchain of Ethereum, a rival cryptocurrency platform.

Institutional investors will soon be able to join the fun by trading bitcoin futures for the first time, first through Cboe Global Markets Inc. on Sunday and then through rival CME Group Inc. on Dec. 18.

As a result, the amount of capital at risk if the cryptocurrency bubble bursts is probably going to grow exponentially. And the traditional financial system, which some predicted would be obliterated by Bitcoin, will become even further integrated into what was once considered a fringe curiosity.

Despite the potential dangers and an eye-popping trading price, bitcoin is going mainstream.

Evolve chief executive Raj Lala said the demand for a Canadian bitcoin ETF is incredibly strong. He said having a regulated futures market on reputable mainstream exchanges is an important first step before offering the fund, because it eliminates the need for actual bitcoin to change hands.

“Futures have become a great proxy way to participate in a commodity,” Lala said. “This just makes for an easier way for you to participate in the price performance of bitcoin.”

But participating in the price performance of bitcoin is certainly not for the faint of heart.

On Friday, bitcoin surged to a new high of more than US$17,000 overnight, plunged to just under US$14,000 by noon and finally recovered to about US$16,000 by the end of the day. Just one year earlier, a single bitcoin was worth just US$770.

Currently, many institutional investors are unable to buy cryptocurrencies for a variety of regulatory and practical reasons. But futures contracts and ETFs will make it possible for them to place bets on the price of bitcoin going up or down using familiar exchanges and financial tools.

Big-name investors might be anxiously awaiting the opportunity to trade bitcoin futures, but the banks, which have to guarantee those trades, are not so eager.

Walt Lukken, chief executive of the Futures Industry Association, which represents financial institutions that hold customer funds and clear trades, expressed his concern in an open letter on Thursday to the U.S. Commodity Futures Trading Commission.

“A more thorough and considered process would have allowed for a robust public discussion among clearing member firms, exchanges and clearinghouses to ascertain the correct margin levels, trading limits, stress testing and related guarantee fund protections and other procedures needed in the event of excessive price movements,” Lukken said.

“The recent volatility in these markets has underscored the importance of setting these levels and processes appropriately and conservatively.”

The bitcoin futures markets that are about to launch are all cash-settled, which means a trader who buys an option to purchase bitcoin at a certain price in the future and holds the contract to expiration will receive or pay the gain or loss in regular central-bank-issued dollars.

In other words, the futures market won’t directly affect demand for bitcoin for the most part, although some investors might spot arbitrage opportunities or hedge their positions by actually buying the cryptocurrency.

However, bitcoin futures and ETFs will increase the digital asset’s visibility and bring it to the masses. The financial instruments will also further cement bitcoin’s current principal use as a store of value, rather than a censorship-resistant payment network that’s independent of government control.

Anthony Di Iorio, a founder of Ethereum and chief executive and co-founder of Jaxx, a multi-cryptocurrency wallet, and Decentral, a Toronto innovation hub, said bitcoin’s evolution from a proposed payment network to an asset worth holding is not necessarily such a bad thing.

He said the big institutional money moving into bitcoin is likely to further increase the fee that miners charge per transaction — making it even less financially viable to use bitcoin as a means of buying a cup of coffee — but there are hundreds of other cryptocurrencies that may be better suited for that purpose.

“Perhaps Bitcoin is not going to be what people thought,” Di Iorio said. “It might not be Bitcoin for the day-to-day stuff, for the smaller things. But other ones are emerging, other ones will still find gaps.”

At a conference in Riga, Latvia, in late November, Bitcoin security expert and entrepreneur Andreas Antonopoulos said the entry of futures doesn’t necessarily mean the cryptocurrency is about to lose its radical roots and become a speculative playground for Wall Street types.

In a video of his remarks posted to YouTube, Antonopoulos said the futures market will perform a useful function for the Bitcoin ecosystem, allowing the miners who secure transactions to hedge against price swings by taking short positions.

“I think it’s important to recognize the CME is not Wall Street,” said Antonopoulos, who works on the oversight board of the exchange’s bitcoin reference rate. “I don’t think these people are as alien to our culture as many believe.”
So, bitcoin finally hit Wall Street with a bang? I've avoided jumping on the bitcoin bandwagon largely because I didn't know enough about cryptocurrencies, the blockchain technology underpinning them, and to be truthful, the whole bitcoin phenomena looked extremely silly to me.

Still, on Friday, I got a phone call from a broker buddy of mine who loves to boast about how much money he's always making in markets. "You gotta write something on bitcoin, it's going to explode up." He invested in it last year and told me "it's headed to $250,000 and when it does, I'm going to make millions, cash out and buy a nice big house."

I listened patiently and some of the points he made sense. For example, he thinks bitcoin is a better store of value than gold and its market cap will reach that of gold and likely supplant it. I mentioned recent events in Saudi Arabia and how elites around the world are growing increasingly anxious about their wealth being arbitrarily confiscated by monarchs, despots and governments.

Perhaps the biggest argument I can make for bitcoin is that rising inequality will eventually lead to political backlash. The power elite is aware of this and wants to protect its wealth using any means necessary from governments looking to redistribute it.

In fact, over the weekend, Marko Papic, Chief Strategist, Geopolitics at BCA Research, posted this on LinkedIn:

To which I replied:


The world is changing, many ubber wealthy individuals are worried about their wealth, especially in countries where they can be persecuted for political reasons, so it's not surprising that bitcoin has taken off in such a massive way.

My initial thoughts on bitcoin were it was being used for money laundering and authorities would allow it to estimate the size of the world's underground economy. As silly as this sounds, there most definitely is a lot of money laundering going on through cryptocurrencies and anyone who claims otherwise is ignorant.

But there is also no doubt in my mind that bitcoin is increasingly being used by high net worth individuals worried about future redistribution policies and looking to hide their wealth from tax authorities. It's not outright money laundering, it's tax evasion, however.

That's why when Jamie Dimon came out to call "bitcoin a fraud", I was shocked because it demonstrated a complete lack of understanding of the political dimensions propelling bitcoin higher. In recent days, Dimon is more "open-minded" on bitcoin and other cryptocurrencies using regulations (aka, he sees potential profits to be made and won't put his foot in his mouth again).

The same goes for Citadel's Ken Griffin who recently stated bitcoin has "elements of the tulip bulb mania". This too demonstrates a total lack of appreciation for what's truly driving bitcoin higher (too easy to dismiss it as just speculative fervor).

Now, I'm not advocating for anyone to jump on the bitcoin bandwagon but given my views, I wouldn't be surprised if bitcoin prices head much higher despite all the naysayers.

Importantly, there is definitely a political dimension to bitcoin which is completely underappreciated by skeptics who dismiss this as just another bubble.

Having said this, there are also risks attached to bitcoin. If bitcoin and other cryptocurrencies continue to thrive, adding billions more to the fortunes of the Winklevoss twins and others, you can bet governments are going to coordinate and find ways to regulate, disrupt, and even go as far as hacking cryptocurrencies.

In fact, there are already security concerns as it was recently reported North Korea was trying to hack bitcoin as the cryptocurrency keeps soaring to record levels.

Also, the SEC just issued a warning to cryptocurrency investors hours after the regulator stopped an "initial coin offering" (ICO) from restaurant review app Munchee and its chairman, Jay Clayton, also warned bitcoin offers ‘substantially less investor protection’ than other markets:
“We have issued investor alerts, bulletins and statements on initial coin offerings and cryptocurrency-related investments,” he said. “If you choose to invest in these products, please ask questions and demand clear answers.”

His statement included a list of sample questions, such as “What specific rights come with my investment?”

The SEC boss emphasized the global nature of the crypto frenzy — and the risks that come with that.

“Please also recognize that these markets span national borders and that significant trading may occur on systems and platforms outside the United States,” Clayton said.

“Your invested funds may quickly travel overseas without your knowledge. As a result, risks can be amplified, including the risk that market regulators, such as the SEC, may not be able to effectively pursue bad actors or recover funds.”
Moreover, the IRS recently ordered Coinbase, a popular platform for buying and selling bitcoin and other cryptocurrencies, to turn over identifying information on accounts worth at least $20,000 during 2013 to 2015. It's unclear whether the exchange will comply or contest the ruling:
The order, which affects about 10,000 accounts, is a narrowing of an earlier effort by the IRS. In a blog on the Coinbase website, the company notes that the first request would have impacted another 480,000 accounts.

The court case arose after the IRS found that for in each year from 2013 to 2015, only about 800 taxpayers claimed bitcoin gains. During that time, the cryptocurrency rose to $430 from about $13.

So how do you determine what you owe?

If you held it for one year or less, it is a considered a short-term gain and is taxed as ordinary income. Depending on your tax bracket for 2017, that could range from a tax rate of 10 percent to 39.6 percent.

Any bitcoin you sold or spent after owning it for more than one year is taxed as a long-term gain. Taxable rates on those gains range from 0 percent to 20 percent, with higher-income households paying the highest rate.

In a nutshell, although bitcoin and its brethren are often viewed as being anonymous, not reporting your gains could be viewed as tax evasion by Uncle Sam.

"I've told clients who own it that it's up to them to track their cost basis, their holding period and their sale price," Boyd said. "It might seem innocuous and veiled and like no one will follow up, but records of those transactions are available."
Earlier today I had a chance to speak with Fred Pye, President of 3iQ, a firm which looks to provide institutional quality portfolios that offer accredited investors core exposure to bitcoin, ether, and litecoin. Their funds will also provide access to leading external active managers in the digital asset space.

Fred is based here in Montreal, he obviously knows his stuff when it comes to bitcoin and other cryptocurrencies. He first showed me Bitnodes, a site which is currently being developed to estimate the size of the bitcoin network by finding all the reachable nodes in the network.

He then showed me how TradeBlock works, taking me over how all these cryptocurrency trades are registered. For example, you can see recent bitcoin blocks live here.

Fred also sent me two comments, one written by his partner Greg Foss, Spot the Horse, which was published on Zero Hedge, and another one, Fat Protocols, on understanding the differences between the Internet and the Blockchain.

Anyway, it goes without saying that Fred is bullish on bitcoin and thinks there is a lot more upside ahead, even if it will be very volatile. Fred used to work at Fidelity and he invested in gold way back when, which was interesting because he feels there can be a market for bitcoin and gold (one doesn't have to supplant the other).

He said there is now $275 billion in cryptocurrencies and the market value of gold is roughly $7 trillion (see figures here) whereas as the value of total global assets is roughly $200 trillion.

"So the first big move is bitcoin heading to 1% of total global financial assets ($2 trillion) and then once institutions like pensions and sovereign wealth funds invest, it can double or triple from that level."

But according to Fred, the real big move will happen "when there is a crisis in fiat currencies" and everyone will be looking to cryptocurrencies to preserve their capital.

Fred isn't exactly some snake oil salesman. If you talk to him, you'll see he really knows his stuff and truly believes in the figures he's quoting, even if they seem wildly optimistic right now.

Exactly how the bitcoin market evolves and how it will impact monetary and fiscal policy remains to be seen. There are too many unknowns right now but as bitcoin becomes mainstream, it will present opportunities and challenges to investors and regulators.

One thing is for sure, institutional investors can't just sit back and ignore bitcoin, blockchain, and other cryptocurrencies. They need to stop listening to skeptics or perennial optimists and really do their homework properly.

As for me, I'm having way too much fun trading biotech shares to focus on bitcoin right now but given my views on the global power elite being scared of redistribution policies in an era of debt deflation, I wouldn't be surprised if bitcoin hits $200,000 before it hits $2000 again. It's just too speculative for my blood.

Still, the people reading this blog should get Fred Pye and other experts to come to their offices to talk to them about cryptocurrencies and how they can get cheap and secure long-only exposure.

Whatever you do, stop listening to Jamie Dimon, Ken Griffin or even Nassim Taleb and Mike Novogratz, do your homework and study these cryptocurrencies and the blockchain technology underpinning them very carefully and think carefully as to which economic and political factors will impact their value going forward.

Below, Andreas Antonopoulos gives you an introduction to bitcoin. You can view more clips on Andreas's YouTube channel here, including bitcoin for beginners.

[Note: Interestingly, Fred told me Andreas wasn't an early investor in bitcoin because "he had to pay the rent" but some investors set up a page to raise money for him to invest in bitcoin.]

Next, Mike Novogratz, Galaxy Investment Partners CEO, the man who called bitcoin $10,000, discusses his next call on bitcoin. He might be right but it will be a bumpy ride up.

Just to reinforce my last point, Interactive Brokers chairman Thomas Peterffy, who took out a full page ad in The Wall Street Journal to warn about bitcoin, insists he doesn't hate the cryptocurrency, but thinks it needs to stay far away from the real economy.

Peterffy said on CNBC's "Fast Money" on Thursday, his concern is that the cryptocurrency could continue to rise to $100,000 or more before crashing to zero, and could pull down small brokerages in the process (Interactive Brokers requires a 50% margin to trade bitcoin futures).

Fourth, Tom Lee, Fundstrat Global Advisors, gives his views on equity portfolio plays for bitcoin for investors that can't or don't want to buy the cryptocurrency. Social Capital's Chamath Palihapitiya also weighs in. Lee also talked about how bitcoin is the investment for millennials. Maybe but Mr. Wonderful isn't sold on the idea of settling deals based on bitcoins.

And Kathryn Haun, first Coinbase board member, provides insight to regulating the digital currency market. According to Ms. Haun, it would be unwise for crooks to launder money through cryptocurrencies, but it doesn't mean that this isn't occuring.

Lastly, Fred Pye, CEO of 3iQ, was interviewed by Michael Hainsworth of BNN. I didn't embed it below because it is easier to watch it here.




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