Bitcoin futures may help the case for a bitcoin ETF

Key Points
  • ProShares' and VanEck's applications for bitcoin exchange-traded funds have apparently stalled because the bitcoin futures they wanted to track don't exist yet.
  • Bitcoin futures could become reality soon after the CME said Tuesday it plans to introduce the derivatives product by the end of the year.
  • However, BlackRock and most other major ETF issuers still aren't looking at bitcoin products yet.
Bitcoin futures may help the case for a bitcoin ETF

One of the barriers to the introduction of a bitcoin exchange-traded fund may soon be removed.

The world's largest futures exchange, CME, said Tuesday it's planning to launch bitcoin futures by the end of the year. While not the first to announce plans for bitcoin futures, CME may have a better chance with regulators, some analysts say. And that means the floodgates could soon open for the institutional investors that can't yet invest in bitcoin.

Bitcoin surged to record highs after the CME news, and was trading near $6,570 Wednesday morning, according to CoinDesk.

Two of the largest ETF sellers, ProShares and VanEck, filed in the last few months with the Securities and Exchange Commission to introduce bitcoin ETFs that track bitcoin futures. But VanEck withdrew its application in late September after the SEC said it wouldn't review a filing for a product whose underlying instruments don't exist.

But now that futures could be offered in eight week's time, that may change. CME chief Terry Duffy said he is "confident" the exchange's self-certification process and application for the bitcoin futures will go through. "We've been working with the regulator. … They understand our model very, very well," Duffy said Tuesday on CNBC's "Closing Bell."

CME plans to launch bitcoin futures

The SEC declined to comment, and the Commodity Futures Trading Commission did not respond to a CNBC request for comment.

"I'm not sure bitcoin futures are going to solve all [the SEC regulators'] need to see, but they are a good step forward," said Chris Burniske, author of "Cryptoassets: The Innovative Investor's Guide to Bitcoin and Beyond."

Even if bitcoin futures launch, the SEC has been wary of bitcoin. "The SEC considers bitcoin exchanges to be largely unregulated," Burniske said.

The cryptocurrency is created through a "mining" process, in which people use computers to solve complex mathematical problems. They are traded on exchanges around the world from Zimbabwe to Switzerland.

In the beginning nearly a decade ago, they were the province of a small group of enthusiasts and often used to buy illegal goods online. But since then, an entire industry has emerged with multiple businesses mining bitcoin, selling digital mining equipment and offering bitcoin trading services. Several long-time investors in traditional stocks and bonds are also moving into digital asset investing, and more than 120 "cryptofunds" exist, according to financial research firm Autonomous Next. What was once a fringe movement has become a globally traded digital asset.

Still, regulators have maintained their skepticism. In March, the SEC rejected an application for a bitcoin ETF from Cameron and Tyler Winklevoss, the brothers who founded the Gemini Trust digital currency exchange. The product would have tracked bitcoins held by Gemini.

Gemini did not return a CNBC request for comment. The SEC said in late April it would review its rejection of the ETF.

CME Group's Duffy on bitcoin futures launch: People are looking for more efficient ways to do commerce

Bitcoin futures would allow institutional investors to buy into the digital currency market without directly investing in bitcoin, which regulations prohibit them from doing.

"I don't think it increases the chance of a Winklevoss ETF, but a futures-based ETF, it definitely does," said Brian Kelly, a member of the working group for the CME bitcoin futures and a CNBC contributor. He is also head of BKCM, which invests client money in digital assets like bitcoin.

Kelly said if bitcoin futures launch as planned, the SEC could approve a bitcoin ETF in the second quarter of 2018.

VanEck did not respond to a CNBC request for comment on the CME news. ProShares declined to comment.

"There's been basically no institutional money that's flown into bitcoin at all, except the rise of cryptofunds," said Spencer Bogart, managing director and head of research at venture capital firm Blockchain Capital. The CME plan for bitcoin futures "is part of a broader theme of opening the floodgates here."

However, "I don't know that this really makes a difference to people that haven't jumped in so far," said Greg King, CEO of RexShares, a company that is pursuing its own bitcoin and cryptocurrency ETFs.

The largest ETF company, BlackRock, told CNBC in a statement that it "does not have plans to launch a bitcoin or digital currency ETF." The second-largest ETF issuer, Vanguard, said it does not comment on future product development. The third-largest ETF issuer, State Street, said it will be the fund administrator and provide accounting services for the Winklevoss ETF if and when it is approved by the SEC.

A spokeswoman for the fourth-largest ETF company, Invesco, said the company did not have any plans to launch a bitcoin ETF and still doesn't have any plans to do so. JPMorgan, which offers some global benchmark ETFs, declined to comment.

But when the world's largest futures exchange launches bitcoin futures, Wall Street may find it harder to ignore the lucrative market the digital currency offers. CME's Duffy cited increasing client interest for the exchange's decision to introduce bitcoin futures.

Some other institutions also want a foot in the door of what could be a new asset class. The Chicago Board Options Exchange, the largest U.S. options exchange, announced in August it intends to launch bitcoin futures by early next year. The CBOE's planned bitcoin futures would track Gemini's data on bitcoin.

In contrast to a single exchange, the CME's bitcoin futures would track an index that's weighted to four bitcoin exchanges: Bitstamp, GDAX, itBit and Kraken. Some analysts say the greater number of inputs to CME's bitcoin index would reduce the likelihood of manipulation, a positive for regulators.

John Deters, CBOE's chief strategy officer and head of multi-asset solutions, said in a statement to CNBC that the company is "very experienced in operating auction-based settlement processes." The company had no direct comment on the CME's plans to launch bitcoin futures.

Separately, a New York-based start-up, LedgerX, began offering its institutional clients bitcoin options in October.

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