CME Group’s announcement that they will begin trading Bitcoin futures catapulted the Bitcoin market to new highs two weeks ago. Many Bitcoin investors are waiting with bated breath for trading to commence and are expecting further price growth. Indeed, when the world’s largest futures market recognizes Bitcoin as a legitimate asset and decides to integrate it into their offerings, it would seem to be a very good thing.
What does it actually accomplish?
But why? Other than CME Group’s imprimatur, which is undoubtedly valuable in itself, what specific good is going to come from this new marketplace? After all, creation of a large and regulated futures market will make it far easier for deep-pocketed traders to short Bitcoin, potentially causing the price to tumble.
Cointelegraph had the opportunity to speak with David Johnson, CEO of Latium and experienced foreign exchange (FX) trader, to get his take on what CME Group’s announcement means. Johnson believes the biggest boost to Bitcoin will come not from the trading of futures per se, but from what that trading enables: retail adoption.
A lesson from the airlines
The airline industry is one of the biggest buyers of oil futures in the world. The reason is obvious; they need to “lock in” the price of jet fuel so they can charge passengers an appropriate fare. If airlines were subject to the daily whims of the oil market, they would find it nearly impossible to operate effectively.
The process of locking in prices on a commodity or asset is referred to as “hedging.” The airlines don’t want to buy massive amounts of jet fuel and have to store it for long periods of time; all they want is a stable price. Therefore, they go to the futures market and buy or sell specific types of options which effectively guarantee the price they will pay for fuel for a period of time.
Right now, most companies that accept Bitcoin as a form of payment use third-party payment processors to receive the Bitcoin and immediately convert it to cash, and deposit the funds in the company’s bank account.
This works, up to a point. Unfortunately, these companies don’t have a long track record and are quite small. Huge retailers, like Walmart or Amazon, probably would be wary of doing business with them.
CME Group’s futures market changes all of this. According to Johnson, major companies with careful risk management strategies have been slow to get involved in Bitcoin because of the risk. There is a risk to storing Bitcoin…