Editorial: Tulips, bitcoin, patience and grace

Editorial: Tulips, bitcoin, patience and grace

It’s been a busy week in the derivatives markets. LME week was once again full of exciting announcements. The London Metal Exchange is set to expand its battery metals offering, as the exchange remains committed to its long-dated contracts and chief executive Matt Chamberlain vowed not to implement a flat fee on its over-the-counter contracts.

As is tradition, the LME’s rival the Chicago Mercantile Exchange attempted to distract attention with not one, but two new shiny metal objects. On Tuesday, the exchange announced it would launch a Shanghai copper premium contract on November 20, a contract type the LME does not offer.

Mere hours later, the Merc said it would launch a cash settled bitcoin future based on its bitcoin reference rate before the end of the year, to rival the contract announced by Cboe. Neither exchange has fixed a launch date for their contracts, but the announcement nevertheless sent the price of the cryptocurrency soaring. On Thursday, the price of bitcoin broke the $7,000 mark for the first time, Jamie Dimon’s scepticism be damned.

Earlier this month, the first registered bitcoin swap execution facility LedgerX reported it had processed $1 million worth of bitcoin options a week after its launch. Although the SEC denied registration to what could have been the world’s first bitcoin exchange traded funds and issued a warning to celebrities endorsing digital tokens last week, the American regulators stopped short of taking decisive action, unlike their Chinese counterparts earlier this fall.

I’m calling it: the forward march of cryptocurrencies can no longer be stopped. They are well on their way to becoming a mainstay both in the real economy and in institutional finance. Bitcoin first came into existence in 2009 and has been called a bubble ever since. The CME’s plans were compared to the run up to the 1637 tulip crash by a set of UBS analysts yesterday, but the analysts may have overlooked one essential difference between the two commodities: the contracts for fractional interests of tulip bulbs that caused the 1637 crash had real-world underlyings and you cannot actually do much with tulips.

Current use of cryptocurrencies is a far cry from the dodgy Silk Road bitcoin economy of the early 2010s. Bitcoin can now buy you credits in Xbox games, hotel rooms in Las Vegas, railway tickets in Switzerland, an Uber ride in Argentina and almost anything in Japan. The fact that the value of the currency is based on little more than animal spirits and the reluctance of die-hard members of the crypto community to sell, will cease to matter once Amazon starts accepting it as payment for your groceries.

The value of bitcoin itself will likely continue to go up for quite some time as mainstream adoption creeps in. The bitcoin system is built so that only 21 million bitcoins will ever be issued. Today, we are at around 16 million, so demand for existing bitcoins is likely to rise, pushing the price further up.

A crash can of course never be ruled out, but I think we’ll be in for one hell of a ride before that happens.

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