The Slow Crawl Towards Bitcoin Institutional Investment

It seems like only yesterday that everyone was calling bitcoin a sham. Well, if you’re following Nouriel Roubini or Ben Hunt on Twitter – it probably was yesterday. But there’s still many a believer, with many of those believing the adherence of Bitcoin and other cryptos by institutional investors will be the catalyst to take Bitcoin prices into numbers not yet seen on the market. It all started with the launch of Bitcoin Futures by the CME and CBOE, which was seen by many as giving it some of the structure needed so that it can’t be ignored. Those contracts haven’t gotten all that big yet, but that’s not stopping more and more players from dipping a tow or two in the space. Here’s a short list of recent moves by banks and exchanges as a way to get product exposure within the regulatory framework.

  1. Goldman Sachs will now use its own money to trade bitcoin futures on behalf of clients because they were getting pressured by clients
  2. The Intercontinental Exchange is looking into offer 1-day Bitcoin Swaps
  3. After launching their own Bitcoin Futures contract, the CME has launched an index for Ethereum, the second largest cryptocurrency. This is often seen as the beginnings of launching a futures contract, even if the CME denies that’s what the index is for

Bitcoin Trading

There are new products on the way, but what about the existing products? There’s plenty of talk about Bitcoin Futures falling 35% from their March highs, but there haven’t been any horror stories so far in and around the index being used by either exchange. Indeed, the CME reported that more Bitcoin Futures contracts rolled from the May contract into the June contract than any contract roll before it, with 473 contracts rolling over. Here’s the CME:

Based on Thursday night’s (May 24th) open interest, customers carried 473 May contracts (BTCK8) into today’s trading session, the highest amount since launch, suggesting that the market has a higher level of comfort with the BRR/BTC settlement process. Before trading concluded for the expiring contract (11:00 am NYT), 971 May contracts traded, slightly higher than what was observed during the April expiration. Roll activity was strong this month and we saw 3,702 spread trades, the highest observed leading to expiration. Average daily OI in May rose to 2,502 contracts, a 24% increase over April.

CME Roll Contacts(Disclaimer: Past performance is not necessarily indicative of future reults)

This is all good news for the fledgling contract and we’re starting to see more and more anecdotal evidence to go along with these stats that the contract is getting some looks. One group, in particular, we’ve been watching is Systematic Alpha, who has launched a new program by porting their existing short term, momentum-based systematic trading models over onto Bitcoin futures. It’s up 17% in the first three months of trading, which might pale in comparison to some of the quadruple-digit gains seen by the bevy of new cryptocurrency funds now listed in hedge fund databases (there’s 20+ now in the BarclayHedge managed futures export, for example). But there are significant differences, in our opinion, between straight-up Crypto Funds which invest in actual cryptocurrencies, participating in ICOs and the like; and a systematic trader buying and selling Bitcoin futures on the exchanges.

In short, we’re much more comfortable with the 2nd one, for some (if not all) of the following reasons:

They are exchange traded and not at risk of being hacked or stolen.

Bitcoin Futures can be sold before they are bought (aka shorted) which allows investors to profit (or lose) just as easily whether Bitcoin is going up or down.

They are more tax efficient for short term speculators as Bitcoin futures contracts are taxed at the 60/40 rate which means 60% long term capital gains tax and 40% short term capital gains tax.


But that’s just the structural framework. The reason short-term systematic fund managers like Systematic Alpha (started in 2004, Princeton Ph.D. portfolio manager) are looking at the market is as much for its market profile (movement, volatility, etc) as the structure. Short-Term algorithmic momentum strategies may view Bitcoin as the long-lost market they’ve been searching for all this time, with tons of directional volatility on which to ply their wares. They don’t mind the high volatility and seemingly weekly moves of +/- 10%. And what’s more, they don’t care if Bitcoin goes to zero, or goes to $25,000. They are simply responding to market price action and participating in the short-term trend, whether that be higher or lower. That sort of trading is difficult to replicate in the physical crypto markets as investors 1.) cannot easily sell short and 2.) the transaction cost makes it prohibitive for investors to trade in and out of Bitcoin.

In short, they don’t care which way it’s going, as long as it moving.

Call us at 855-726-0050 to learn more about funds trading long and short Bitcoin prices via the futures markets.

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