William Mallers, Jr. started First American Discount Corporation with his father in 1984, eventually building it into the third-largest discount futures brokerage. He sold it in 2001 to Man Financial and then retired.
In this opinion piece, Mallers argues CME Group's plan to offer bitcoin futures will benefit the futures trading industry and the bitcoin community alike – notwithstanding hand-wringing in both worlds about the idea.
I'm a member of the Chicago Mercantile Exchange. I've also been a bitcoiner since 2013. So, when CME Group announced its intention to launch bitcoin futures in the coming weeks, I thought, "Great! Way to go, CME."
The first exchange to offer a futures contract on bitcoin is good news for my CME friends: more trading volume and and speculative opportunities. And it's also good for my bitcoin friends: the legitimacy and access is sure to help with adoption and higher bitcoin prices. Win-win! Right?
Well, that wasn't quite the response I got.
Instead I heard just about every negative stereotype about both futures trading and bitcoin, from both communities. Let's try to put these misperceptions to rest.
'Tulips' in 5,4,3...
First, there’s this from the futures industry’s most widely read blog, John Lothian News:
"The risk of bitcoin is in its history and the cloud surrounding its creation and early fraudulent days. Who is Satoshi? Where is he today? What happened at Mt. Gox? Is it still used to launder money? Why won't China let people trade bitcoin and what does this have to do with money laundering or capital controls?"
Good Lord. If you've been in enough arguments with bitcoin skeptics you know what's coming after the drug-dealing, money-laundering slam, right? Next up: the tulip-bulb analogy.
Sure enough, Lothian says, "I don’t want to be on the wrong side of history. But the history I am looking at is … 1636-37. That was the peak of tulipmania."
And that, my friends, is why I spent my first two years in bitcoin not sharing my passion with any non-bitcoiners. "Bitcoin? Never heard of it."
But because I have benefited from all the hard work that others have done to advance this project – hosting meetups, dispelling misinformation – and all I've done is log into my account and click "Buy," I thought I'd try to do my part.
A margin clerk's dream
Here's what I wrote to Lothian (a former employee at the futures brokerage I ran), and maybe it will help you with your bitcoin futures doubters:
"Hey John, it's Junior from your old FADC [First American Discount Corporation] days and I’ll be glad to help you understand bitcoin.
"But first – recall how you used to try to collect margin money by first asking the customer to provide a contact at his bank who could confirm that he had sufficient funds in his account and that he had initiated the wire. Why did we have you do that? Because we knew we wouldn’t get the money until the next day; his bank, while debiting his account immediately, would wait until the end of the day to wire us the money (unless he stopped the wire) and our bank wouldn’t credit us until mid-morning the next day, at the earliest.
"Now, imagine, instead of that 24-hour headache, your under-margined customer simply waved his cell phone at our FADC QR code and we got the money within 10 minutes, or at most a few hours. Bitcoin is a margin clerk's dream come true: near-instant peer-to-peer value transfer! It's easy to see why Jamie Dimon doesn’t like it, but a former margin clerk? You should be loving this technology and cheering for its adoption!
"I know having an asset protected by the computing power of a globally distributed network doesn't feel as secure as having armed guards protecting a bank vault, but if you get some time, there are websites that estimate the cost of amassing enough computing power to defraud the bitcoin network. This site estimates about $1 billion in electricity per day, plus over $1 billion in equipment, to counterfeit one transaction. In other words, it would be way cheaper for the Hunt brothers to corner today’s silver market than it would be for me to con an online retailer like Overstock into sending me free patio furniture. It's called a '51% attack' because I’d need to control a majority of the network hashing power to get a consensus mechanism to accept my phony accounting.
"Bernie Madoff-style cons are hard to pull off; I need years to earn my victims' trust, I have to get a reputable accounting firm to bless my forged statements, etc ... but Madoff's con was far easier than going undetected while amassing billions' worth of computing power. Plus, since new bitcoins are awarded to the miners proportionate to their computational contribution, if I did have that much computing power, I may as well amass bitcoins the honest way, right?
"That's one of the fun insights into this project: it manages to align all participants through economic incentive."
When Terry Duffy, CME's CEO, says it's offering bitcoin futures in response to customer demand, I'm sure he’s right.
I know from writing brochures for commodity trading advisors that money managers want non-correlated assets. That's the only reason they own gold.
When the stock market tanks or a terrorist attack happens, that's when gold rallies. After 9/11, the stock market dropped over 7 percent, but gold spiked.
Bitcoin, like gold, is a perfect non-correlated asset to add to an investment portfolio. I am not surprised that there is such overwhelming demand for bitcoin futures from traders. Now, every trader is going to have the option to invest right there on their screen without having to do the onerous work of buying and securing bitcoin itself.
As for claims that CME futures trading will put the exchange at risk, they are overblown.
CME clearing privilege requires a large amount of capital. If a member's capital level drops below the threshold required to clear, the CME removes customer accounts and places them with a firm that has the capital to support them. Again, customers come first.
Stock index futures functioned as designed during the 1987 crash, grain futures likewise during the 1988 drought, currencies during the high volatility after the Plaza Accord. Consider this: prior to 1982, if you’d predicted where the most successful stock index contract would launch, you’d guess probably the New York Stock Exchange, right? But S&P 500 Index Futures launched at the Chicago exchanges next to the pork-belly pit, U.S. Treasury futures next to the soybean pit.
CME has done its homework on bitcoin; it's well aware of bitcoin's volatile price history and has the experience and controls in place to clear bitcoin futures.
Amazing, isn't it? The exchange that offers risk-management products should avoid bitcoin because it’s "risky?" Huh? I’ve never seen anything like bitcoin that inspires such lame arguments from its opponents.
This ain't Wall Street
Then, there's all the bitcoiners' FUD: "Here comes Wall Street to drive the price of bitcoin down, manipulate the market and ruin it for us!"
Suffice it to say, for many of the same reasons I gave above, I don’t believe that to be true.
Keep in mind that CME is not Wall Street. The Chicago exchanges have an ethos like bitcoin's: transparency, security, independence and accountability.
To all the people hand-wringing on both sides, let's just see how this plays out. I have decades of experience with the Chicago exchanges and feel reasonably certain that you all are wasting your breath and paying too much for full-page ads in print newspapers.
Let's get this thing to the moon!
Disclosure: CME Group is an investor in CoinDesk's parent company, Digital Currency Group.
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