Ethereum Futures: Small Announcement, Big News

Last week we talked about the claim made by the San Francisco Fed study, which concluded that the advent of futures trading in bitcoin was responsible for the crypto crash that began last December.

If you truly believe the SFO Fed had it thinking cap on right you will want to sell all of your ether.  On the other hand, we think it is more likely that the authors of the report were merely taking advantage of California’s new cannabis laws.  So before taking any action, let’s look at what is happening. I think the timing could not have come at a better time for Ethereum investors.

Small Announcement, Big Implications

It all began last Friday when UK based Crypto Facilities, a tiny startup, launched ether futures contracts.  This is the first time ether futures have been offered on a regulated platform. The most obvious implication is that now anyone wishing to do so can protect the volatility of their investment by going long or short the ether contract.

This move by Crypto Facilities tweaked the interest of the Chicago Mercantile Exchange (CME Group).  About the same time last Friday, the CME announced the launch of a so called Ether reference rate and real time ether-dollar index.  This involves providing a daily price index in US dollars everyday as well as the real time order book activity from Kraken and Bitstamp. The rates are already available online on both the CME Group and Crypto Facilities websites, and will be provided to the CME Group Market Data Platform starting June 4.

Adding Appeal To Ether

Caveat emptor, the announcements by both parties is just the first step in adding legitimacy to Ethereum.  The number of ether futures contracts that Crypto Facilities is likely to handle will probably turn out to be pretty small.  Additionally, CME is merely posting prices and treading depth, not writing actual futures contracts.

But the moves will inevitably bring both the CME and the CBOE into the Ethereum futures picture.  It is just a matter of time and the amount of time is likely to be very short before the move takes place.

What Does It Mean

Liquidity is a problem with cryptocurrencies no matter if you are an investor or a day trader.  It will continue to be this way until the issues of scalability are solved. This is likely to be a gradual process of incremental improvements over a time period of 5-10 years.

This means that above average volatility will be with us for quite a while.  Futures markets may be volatile also but they offer the opportunity to hedge positions and that can be a real advantage.  Imagine if you bought bitcoin last May around $1,750 then rode it all the way to $19,000. Selling a bitcoin futures contract less than a week later would have saved bundles of bucks, not to mention taxes.

Ethereum Is Already A Legitimate Platform

In their recently released first quarter 2018 report on cryptocurrencies, Coindesk measures $3.6 billion in capital raised through ICOs.  There are fewer coin offerings but the average size has significantly increased. That statement is accurate even with Telegrams $1.6 billion deal taken into account.  What this says is that institutional size capital increasingly is making its way into the marketplace.

When I last checked, the Ethereum platform was the choice of over 80% of ICOs; no other platform was anywhere close. Ethereum clearly has a target on its back and many of those ICOs believe they are a better version of king of smart contracts but the Ethereum platform continues to have the most to offer.

Futures Contracts Appeal To Hedge Funds

Here is a trick question.  How many hedge funds are fully hedged or even hedged at all? Here is an honest answer: I don’t really know.  You would think that in order to qualify to be a hedge fund, you need to hedge something. My best guess is that in the one directional bull market that stocks have experienced for the last decade, most hedge funds aren’t hedged at all.

Well, during this time hedge funds have consistently under-performed the overall stock market benchmarks like the Nasdaq or even the conservative S&P 500.  Cryptocurrency returns offer game changing opportunity and having futures contracts that actually provide a hedge for risk is huge. The number of crypto hedge funds continues to rise and after better than a 60% price increase during the month of April, more will follow.  Having an Ethereum futures contract will change the risk dynamics for the better.

Featured image courtesy of Shutterstock.

James Waggoner is a veteran Wall Street analyst and hedge fund manager who has spent the past few years researching the fintech possibilities of cryptocurrencies. He has a special passion for writing about the future of crypto.