Will Bitcoin Futures Help Stabilize Volatility?

Summary

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Podcast Summary

WSJ Your Money Briefing

Episode: Will Bitcoin Futures Help Stabilize Volatility?
Date: December 4, 2017
Host: Annemarie Fertoldi
Guest: Alex Osipovich (Wall Street Journal Reporter)

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Episode Overview

This episode addresses a major milestone in the evolution of bitcoin: the US Commodity Futures Trading Commission (CFTC) has approved two Chicago exchanges to launch bitcoin futures. The conversation focuses on what this development means for bitcoin’s future, its potential to reduce volatility, and the overall regulatory landscape. Wall Street Journal reporter Alex Osipovich joins Annemarie Fertoldi to unpack the implications for investors, regulators, and the broader cryptocurrency ecosystem.

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Key Discussion Points & Insights

1. Bitcoin Futures: A Major Step Forward

• Background: Bitcoin recently surged past $11,000. The CFTC’s approval allows major exchanges (CME and CBOE) to launch bitcoin futures, introducing more regulated bitcoin trading avenues.
• Main Impact:
  • Legitimization: It opens the door for large institutional investors (big banks, hedge funds, asset managers) who’ve avoided direct bitcoin markets due to lack of regulation.
  • Ability to Short: For the first time, traders can easily "short" bitcoin—betting on its price falling—which is difficult in the spot bitcoin market.
    • Alex Osipovich (01:14):

      "They will also be able to short bitcoin... That will make big trading firms a lot more comfortable in the ability to trade bitcoin."

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2. Regulatory Signals: Warming Attitudes?

• Diverging Regulator Views:
  • CFTC vs. SEC: CFTC more welcoming; sees bitcoin as a commodity (like oil or gold). The SEC has been more skeptical, highlighted by its previous rejection of bitcoin ETF proposals.
  • Industry Reaction: Enthusiasts shifted their focus to the CFTC after ETF setbacks.
    • Alex Osipovich (02:24):

      "I think that...the government as a whole is maybe warming up a little bit to Bitcoin and different factions of it and different officials within it are friendlier than the others."

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3. Conditions for Approval and Manipulation Concerns

• Ensuring Market Integrity:
  • Underlying Exchanges: Bitcoin’s price is determined by various young, often volatile exchanges with a history of dubious activities and market manipulation.
  • CFTC’s Safeguards:
    • Required CME and CBOE to sign information-sharing agreements with the bitcoin exchanges underlying the futures contracts, to monitor for manipulation and red flags.
      • Alex Osipovich (03:42):

        "They committed to the regulator, that they're going to very closely monitor what happens in the underlying bitcoin market, and...keep an eye out for any sort of red flags that any sort of manipulative activity could be happening."

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4. Regulatory Process and Price Volatility

• Bitcoin’s Volatility:
  • Wild price action (briefly above $11,300) did not directly influence the pace of the regulatory process.
  • Regulatory review, especially for CME, had been underway regardless of volatile swings.
    • Alex Osipovich (05:18):

      "My feeling...is that the regulatory process was sort of plodding along at its own pace even before bitcoin cracked through the 10,000 mark..."

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5. Could Futures Trading Stabilize Bitcoin?

• Possibility of Reduced Volatility:
  • Futures allow both bullish and bearish traders to participate, introducing more balance and potentially tempering price swings.
    • Alex Osipovich (06:16):

      "You'll be able to trade bitcoin futures and sort of send a signal to the market that, you know, maybe I think it's over, overvalued...this could limit the notorious volatility of bitcoin to some degree."

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6. Bitcoin: Commodity or Currency?

• Philosophical Debate:
  • Is bitcoin a store of value (like gold) or a medium of exchange (a true currency)?
  • Most usage and trading currently reflect a "store of value" mentality; not widely used for everyday payments.
    • Alex Osipovich (07:10):

      "Is bitcoin a store of value? Is it sort of like gold where you buy it and hoard it...or is it a medium of exchange?"

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7. Investor Impact and Future Prospects

• Credibility Boost:
  • Institutional interest is likely to grow as regulatory approval signals legitimacy.
  • Futures trading is more complex and may appeal first to sophisticated investors.
    • Alex Osipovich (08:06):

      "At this point in time, any headline that makes it seem that bitcoin is gaining credibility with Wall street is going to be bullish for bitcoin...But you have to be a bit more sophisticated to do it."

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Notable Quotes & Memorable Moments

• On Shorting Bitcoin:

  "You can buy bitcoin, hold onto it and watch its value increase or fall, but it's not very easy to short bitcoin."
  — Alex Osipovich (01:33)

• On CFTC’s Regulatory Role:

  "At the CFTC they're relatively pro Bitcoin."
  — Alex Osipovich (03:15)

• On Futures Impacting Volatility:

  "There are a lot of...seasoned bitcoin traders out there who expect that this could limit the notorious volatility of bitcoin to some degree."
  — Alex Osipovich (06:36)

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Important Timestamps

• 00:34 – Bitcoin price surge context and intro to futures approval
• 01:14 – Regulatory and market significance of bitcoin futures
• 02:24 – Regulators’ differing attitudes and bitcoin classified as a commodity
• 03:42 – Conditions for approval: addressing manipulation concerns
• 05:18 – Regulatory process independent of recent volatility
• 06:16 – Possibility of bitcoin futures reducing volatility
• 07:10 – Store of value vs. medium of exchange debate
• 08:06 – How participation in futures may evolve and affect bitcoin’s reputation

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Tone and Language

• The conversation is clear, analytic, and measured, typical of WSJ’s finance coverage.
• Both host and guest stick to facts and professional observations without speculation.
• Alex Osipovich offers reasoned, cautious analysis rather than hype.

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Summary

This episode offers an authoritative primer on the approval of bitcoin futures and its potential ramifications. It demystifies the regulatory process, addresses investor concerns, and situates the development within the broader philosophical debate about bitcoin’s nature. For anyone wanting to understand what bitcoin futures mean for volatility, legitimacy, and institutional interest, this episode provides focused, expert insight—direct from Wall Street’s own reporters.

Transcript

[Charles Schwab Announcer]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day, but what policy changes should investors be watching? Washington Wise is an original podcast from Charles Schwab that unpacks the stories making news in Washington right now and how they may affect your finances and portfolio. [e-mail] WashingtonWise.

[Wall Street Journal Promo Announcer]

This is yous Money Matters from the Wall Street Journal.

[Annemarie Fertoldi]

Welcome to youo Money Matters. I'm Annemarie Fertoldi in New York. Bitcoin's been in the news a lot lately after recently racing up to $11,000 for the first time on Wednesday. And investors continue to get hooked despite bitcoin's wild swings. Now a federal regulator has given approval to two exchanges in Chicago to launch bitcoin futures. Joining me now in New York to talk about what this means for the future of the cryptocurrency is Wall Street Journal reporter Alex Ossipovich. Alex, Friday's approval from the US Commodity Futures Trading Commission clears the way for these exchanges to launch bitcoin futures later this month. In your piece for the Wall Street Journal, you write that this could be a huge step for bitcoin. How so?

[Alex Osipovich]

Well, there are a couple of things. First of all, the bitcoin market has historically been pretty marginal. It started out with these kind of anarchist, libertarian software geek types, and gradually it's become more mainstream. But there's a big impediment to the ability of big Wall street banks and hedge funds and asset managers, companies like Hero Price, to trade bitcoin. And that is it's not traded on a regulated marketplace. If they trade bitcoin futures, that's by definition on a regulated marketplace regulated by the cftc, which just made this announcement. So that's one thing. They will also be able to short bitcoin. And what that means is basically to place bets that bitcoin is going to fall in price. And this is pretty significant because you kind of can't do it right now. You can buy bitcoin, hold onto it and watch its value increase or fall, but it's not very easy to short bitcoin. If you short bitcoin, then basically that allows you to hedge against a fall in the price of bitcoin. And that will make big trading firms a lot more comfortable in the ability to trade bitcoin.

[Annemarie Fertoldi]

Does this approval signal that the government is starting to warm up to more widespread use of bitcoin?

[Alex Osipovich]

I think so. I think that there is a bit of an interesting dynamic between the different financial Regulators here. The CFTC has historically been kind of a small and scrappy financial regulator. It has a smaller staff than any of the other financial regulators out there. And the sec, which is probably better known to most people out there because it regulates the stock stock market, has been more skeptical of Bitcoin. Earlier this year it denied a Bitcoin ETF application. After that, bitcoin fanatics all kind of turned their longing eyes to the cftc, hoping for some regulatory love. The CFTC has said for the past couple of years that it views Bitcoin as a commodity, meaning that legally in the eyes of the cftc, it's similar to crude oil or soybeans or gold. And this is basically kind of a logical step in the evolution of the CFTC is thinking about Bitcoin. But yeah, broadly I would say that, you know, the, the government as a whole is maybe warming up a little bit to Bitcoin and different factions of it and different officials within it are friendlier than the others. I think that it's safe to say that at the CFTC they're relatively pro Bitcoin.

[Annemarie Fertoldi]

I'm curious about the conditions Bitcoin had to meet to gain approval from the Commission. I understand from your piece that significant changes were made at the regulator's request.

[Alex Osipovich]

Yeah, yeah, there was some tinkering done. The main thing is that essentially bitcoin trades in these kind of underlying exchanges, which are all kind of, you know, startup type companies that are only a few years old and they're places where people who hold bitcoins can get together and buy and sell them and they help figure out what the price is. The futures market kind of sits on top of that. And for cme, for example, to launch its Bitcoin futures, it needed to partner with, with some underlying exchanges so they can basically figure out what is the price of Bitcoin and then its futures contract will track that price. The problem is that these underlying bitcoin exchanges, there's a history of a lot of dubious activity happening on them. They tend to be very volatile, they go down sometimes, they have flash crashes. And there is a lot of concern out there about market manipulation. And so when CME announced that it was going to launch bitcoin futures, one of the big questions out there was, well, is the CFTC going to be comfortable with the risk that this contract could be manipulated? What they announced was that cme, along with sibo, the other futures exchange that want to launch bitcoin futures, that these exchanges had agreed to enter into information sharing agreements with the underlying bitcoin exchanges, what that basically means is that they committed to the regulator, that they're going to very closely monitor what happens in the underlying bitcoin market, and they will keep an eye out for any sort of red flags that any sort of manipulative activity could be happening.

[Annemarie Fertoldi]

Alex, bitcoin has obviously been pretty volatile, especially last week. How much did that factor into regulatory concerns?

[Alex Osipovich]

You know, it's hard to read, but my feeling of it is that the regulatory process was sort of plodding along at its own pace even before bitcoin cracked through the 10,000 mark, rocketed up to 11,300 and change, and then dropped back down and then bounced up again as it does from day to day. This process had been going on in the, in the case of CME Group, the bigger exchange here, they've been going on for the past six weeks. In the case of cboe, the smaller exchange that once launched bitcoin futures, it had been going on for four months prior to Friday's announcement.

[Annemarie Fertoldi]

I've been speaking with Wall Street Journal reporter Alex Osipovich about bitcoin futures, and you're listening to youo Money Matters from the Wall Street Journal. Welcome back, everybody. Alex, we know by now that bitcoin can get pretty volatile. As we've just been speaking about. Is approving the launch of bitcoin futures a move that could potentially help stabilize it?

[Alex Osipovich]

Yeah, so that's one of the interesting things people say about bitcoin futures. Basically, futures allow you to short a contract, right? So that means you can bet that it will fall. And that means that all the people out there who are sort of bitcoin bears and think that, you know, it's overpriced will now have a way to express their view in the marketplace. And you'll, you'll, you'll be able to trade bitcoin futures and sort of send a signal to the market that, you know, maybe I think it's over, overvalued. And there are a lot of kind of seasoned bitcoin traders out there who expect that this could limit the notorious volatility of bitcoin to some degree.

[Annemarie Fertoldi]

And I want to go back to something you touched upon before. There has been this big debate about whether bitcoin is a currency or a commodity. But bitcoin futures share some things in common now with other commodities like oil and gold, because they would allow traders to bet on whether the price will rise or fall.

[Alex Osipovich]

Yeah, I mean, this is a philosophical issue. I mean, is bitcoin A store of value? Is it sort of like gold where you buy it and hoard it and, you know, it's kind of a hedge against inflation? Or is it a medium of exchange in which you, you know, it's basically a means of payment to other people? I would say at the current point in time, the, the whole idea that Bitcoin is a store of value is winning trading activity in Bitcoin. There's just not that many places accept Bitcoin as payment today. But there are a lot of people out there who own Bitcoin because they think it's going to keep on rising in price. I don't know how much the CFTC's announcement on Friday kind of weighs into that debate, but as one regulator, you know, laying a stake in the ground and saying, hey, we think this is a commodity and this is how we think it should be looked at, and

[Annemarie Fertoldi]

how do you think this will impact interest from investors in the short term? We've seen people continue to dive in despite all the ups and downs and fears of a bitcoin bubble.

[Alex Osipovich]

I think that at this point in time, any headline that makes it seem that bitcoin is gaining credibility with Wall street is going to be bullish for bitcoin. And I'm not in the business of making price predictions, but that's just been my observation over the past few months with various announcements saying, for example, that Goldman Sachs was looking into getting into Bitcoin. I would say that, you know, in point of fact, it is going to take a certain kind of trader trade, Bitcoin futures. Trading futures just isn't as easy as going into your Schwab account and, you know, buying stocks or ETFs. It's a bit of a specialist thing. You can do it through the same sorts of E brokers that are out there, but you have to be a bit more sophisticated to do it.

[Annemarie Fertoldi]

Okay. I've been speaking with the Wall Street Journal's Alex Osipovich. Alex, thanks so much for joining me.

[Alex Osipovich]

Thank you.

[Annemarie Fertoldi]

And thank you for listening to youo Money Matters. I'm Ann Marie Fertoldi in New York.

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