On November 29, 2017, Nasdaq Inc. and Cantor Fitzgerald announced their interest in listing bitcoin futures. Both firms hope to launch products in the first half of 2018.
Through its bitcoin futures, Nasdaq reportedly wants to set itself apart from the CME Group and CBOE Global Markets Inc. with improved tracking of the global bitcoin price. While CME’s Bitcoin Reference Rate (BRR) draws data from just four cryptocurrency exchanges, Nasdaq’s product would utilize data from 50 bitcoin exchanges – likely making its product less vulnerable to thin order books or market manipulation.
At present, Nasdaq Stockholm currently offers bitcoin and Ether ETNs, or exchange-traded notes. Nasdaq’s bitcoin futures would be available on Nasdaq Futures (NFX), which typically focuses on energy futures. Notably, Nasdaq’s bitcoin futures are being developed with money manager VanEck, which in September 2017, withdrew a request to the Securities and Exchange Commission seeking approval for an ETF based on bitcoin futures.
Meanwhile, Cantor Fitzgerald would offer bitcoin swaps on Cantor Futures Exchange LP. Traders would bet on price fluctuations up to three months out, and there would be some protections afforded at the $5,000 and $15,000 price levels. It’s unclear whether these are circuit breakers or strict limits on price movements.
Clearly, there’s an abiding sense that cryptocurrency is the new financial horizon. Bitcoin futures could present ever greater opportunities for speculation and profit (or loss).
“The asset class is not going away,” Shawn Matthews, chief executive of Cantor Fitzgerald & Co. told the Wall Street Journal. “If you look at the next level, it will be the institutions coming in and being larger participants in the marketplace, especially as liquidity gets better.”
Matthews makes a significant assumption here. The question is, will bitcoin liquidity improve?
As of November 2017, approximately 16.7 million bitcoins have been mined. According to recent estimates by Chainalysis, between 2.78 million and 3.79 million bitcoins are lost forever because of misplaced private keys, crashed computers, and fat fingers among a myriad of issues.
This means that today, there are between 12.91 million and 13.92 million bitcoins accessible in the ecosystem. Even if every remaining bitcoin is mined without further losses accruing, then there would be 18.22 million bitcoins worldwide – and that’s at the very best!
The point is that there are not very many bitcoins – and their value proposition may be changing. Early adopters praised bitcoin because of its underlying innovation. With blockchain technology, for the first time people had the ability to reliably transmit value over a completely decentralized network. Bitcoin slowly took hold because of the network effects created through adoption and usage. Where would we be without the infamous 10,000 BTC pizzas?
But with the new wave of interest, we must examine whether bitcoin’s value is being driven by its utility or simply its scarcity.
Today, as more and more people rush to buy bitcoin, the limited supply is in high demand. Bitcoin’s increasing price has become a self-fulfilling prophecy, if not a fact (the only things that are certain are death, taxes, and crypto gains).*
In the most basic terms, it appears that as bitcoin’s price goes up, more people want to purchase bitcoin as an investment. And, as bitcoin increases in value, fewer people want to sell their precious holdings. The shortage appears to drive bitcoin’s price ever higher in a strange, deflationary feedback loop.
This is all to say, it’s unclear why Matthews suggests that liquidity would improve. In this author’s opinion, increased liquidity appears unlikely barring dramatic change. Nonetheless, the future remains uncertain.
*This is not investment advice.