The irony is delicious. Bitcoin, biggest of the cryptocurrencies, was heralded as a technology that would set us free from the sclerotic institutions of a fetid financial system: central banks, commercial bank oligopolies, bought-and-paid-for regulators.
What has happened instead? As an alternative medium of exchange, bitcoin has gone essentially nowhere. It has thrived only as a speculative asset — and, in that capacity, trading in bitcoin is being pulled slowly into the very edifice it was meant to pull down.
It started in December, when two big exchanges, the CME Group and the Cboe Global Markets, launched bitcoin futures trading operations. This week, the assimilation continued: Goldman Sachs, most prestigious of the major Wall Street banks, announced that it would start a futures trading operation and is looking into the direct trading of bitcoin. The New York Stock Exchange, part of the Intercontinental Exchange, is reportedly setting up an online platform for buying and holding bitcoin.
Why would major institutions support the trading of an asset that has no intrinsic value, no aesthetic value, no government backing, and is a nearly useless medium of exchange? There can be only one reason: clients are asking for the service.
This is fine. Goldman and the NYSE exist to facilitate trading wherever there is demand for a market. Are credulous cryptocurrency investors going to get hurt? It seems likely. But so long as bolstering the market does not increase systemic risk, that is not a problem for the public or regulators to worry about. And as of now, bitcoin is too small to pose a systemic risk. Its market capitalisation is $156bn, half what it was in December, before some of the froth blew off. To the degree the market is rational, that figure will eventually arrive at zero, and there will be no systemic risk whatsoever. On the Cboe and CME, average daily volume in the most liquid futures contracts comes to a nominal value of less than $250m. The actual money at risk is much lower than that because positions net against each other. Fewer than 10,000 contracts are traded on a normal day. Across asset classes and venues, the CME alone traded 17m futures contracts a day in April. Bitcoin is tiny.
Does bitcoin trading at venerable institutions give a veneer of respectability to what is, in effect, a casino — and therefore increase the chance the market will grow to a threatening size? It makes sense that it would, but this risk is offset by the advantages of institutionalisation. If bitcoin trading and futures trading is done on proper exchanges, then the volume of the trading becomes publicly known. If volumes become dangerously high, action can be taken. On counterparty risk (which, cynics will note, is a kind of risk that bitcoin was meant to eliminate), if the exchanges take normal precautions to separate trading from asset storage, that will provide a measure of safety.
Finally, exchanges have clear rules governing the segregation and handling of client assets. Not so with bitcoin exchanges, where the holding of clients’ money is largely unregulated.
Those of us who do not own bitcoin do not need to worry about it yet. And the institutionalisation of the bitcoin trading is, on balance, a systemic risk-reducer. That said, this phenomenon — major financial companies getting in on the trading of a nonsense asset — is disquieting all the same. It is just the kind of speculative activity, unrestrained by common sense, that one would expect to see at a market top.
It is one more piece of evidence for those who argue that this long cycle is turning over. Do not worry about bitcoin. Worry about everything else.
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