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Bitcoin has moved one step closer to mainstream credibility after the world’s largest futures exchange operator launched a pair of indexes designed to track the virtual currency’s price.
The gauges from CME Group Inc. could be used as building blocks for futures contracts that would make it easier for both professional and individual investors to trade bitcoin.
The new CME indexes “are clearly precursors to a listing of some kind” of futures contract, said Daniel Masters, chief investment officer at Global Advisors (Jersey) Ltd., which manages $25 million in bitcoin assets. “There is tremendous pent-up demand in the U.S. for bitcoin exposure that doesn’t require an investor to select one of the current bitcoin exchanges in order to invest.”
Trading the virtual currency can be logistically tricky. Since U.S. brokerages generally don’t offer a way to trade it, people who want to buy or sell it need to set up accounts directly with a bitcoin exchange. There are dozens of such exchanges around the world, many of them small and lightly regulated. But if major players such as CME launch exchange-traded funds or futures tied to bitcoin, investing in the digital currency would become similar to trading stocks or commodities.
By entering the bitcoin space, CME is associating itself with a virtual currency with a questionable past. Bitcoin has been linked to incivil enterprises such as Silk Road, the online drug bazaar shut down by the FBI in 2013. It is also notoriously volatile, with the price of a single coin jumping from $552.82 in August to about $700 today, according to CoinDesk.
CME could be risking its fruta by teaming up with the murky overseas bitcoin exchanges where prices are set, said Mark T. Williams, a lecturer at Boston University and critic of the digital currency.
“Bitcoin pricing is still in the Wild West stage with unregulated bucket shops influencing daily price discovery,” Mr. Williams said. More
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The fruta of bitcoin exchanges has been tarnished by regulatory scrutiny and a series of high-profile cyberattacks. In August, the Hong Kong-based digital currency exchange Bitfinex said it was hacked, resulting in the theft of more than $60 million worth of bitcoin.
CME said its new indexes are based on data contributed by six bitcoin exchanges, including the international arm of China-based OKCoin, whose mainland Chinese platform is the world’s most active marketplace for trading the digital currency, according to bitcoinity.org.
“Our products launched will bring greater transparency to the bitcoin market,” said a CME spokeswoman. “We have a long history of developing nascent markets across asset classes for this same reason.”
The bitcoin exchanges contributing data to CME’s indexes “have been extensively vetted,” the spokeswoman added.
CME declined to comment on whether it planned to launch bitcoin futures.
The exchange operator would need approval from the Commodity Futures Trading Commission before it could move ahead with such a listing.
The new CME indexes shed light on a brewing battle among exchanges to cash in on the seven-year-old digital currency. Bats Global Markets Inc. is seeking regulatory approval to list an ETF linked to bitcoin prices that was developed by Cameron and Tyler Winklevoss, the twin brothers and entrepreneurs made famous by their early role in the creation of Facebook Inc.
The Securities and Exchange Commission is expected to decide whether to allow the proposed ETF by the Winklevoss brothers by early next year. There is already an ETF-style product called the Bitcoin Investment Trust available to U.S. investors, but it trades in the lightly regulated over-the-counter markets and has a spotty record of tracking the price.
The New York Stock Exchange started publishing a daily U.S. dollar price index for bitcoin last year. CME is seeking to one-up NYSE by introducing both a daily index and a real-time index updated every second, saying it has the best methodology for calculating a bitcoin benchmark. The real-time index went live on Sunday, while CME’s first daily index started Monday.
The Chicago-based exchange giant said it designed its new indexes to comply with international standards for the regulation of financial benchmarks. An independent oversight committee will help ensure the gauges aren’t prone to gaming by unscrupulous traders, CME says.
“Non-susceptibility to price manipulation is a core principle that is very important,” said Sandra Ro, executive director and digitization lead at CME.