What's going on?
Major US exchanges were given the green light by the regulator on Friday to trade financial investments directly tied to the value of bitcoin (a.k.a. futures), paving the way for big investors to trade the cryptocurrency.
What does this mean?
Bitcoin has exploded in value this year, but there are still substantial barriers blocking major investors from buying and selling it. For one, only a relatively small amount of bitcoin trades each day; a huge investor would struggle to buy enough to make a difference to their returns without totally distorting bitcoin’s price. Also, concerns over the security of owning bitcoin remain.
The creation of bitcoin “futures” is a big step toward solving these problems. Futures are derivative financial instruments whose value is tied to an underlying investment: in this case, it’s bitcoin. The first bitcoin future is now set to begin trading on December 18th (tweet this).
Why should I care?
The bigger picture: This news is an indication of bitcoin’s growing acceptance among mainstream investors.
The impact of having bitcoin-linked investments traded on America’s biggest exchanges could be huge! It will allow for even more bitcoin-linked investment products to be created, conceivably nurturing bitcoin’s wider acceptance by investors that are used to owning more traditional investments like stocks, bonds and gold. The more entrenched bitcoin becomes with established investors, the more likely it is to ultimately justify its existence as a genuine store of value (like a digital version of gold).
For markets: This move isn’t necessarily good or bad for bitcoin’s price.
While it may seem logical that allowing better access to bitcoin is naturally good for its price, futures will also allow investors to bet against bitcoin – making it much easier for investors to exert downward pressure on bitcoin’s price. Futures should also make the process of determining bitcoin’s price more efficient: since there will be more investors involved, in theory, the price of bitcoin should more accurately reflect its utility as a currency/commodity.