Gold and Cryptocurrencies

The CHICAGO BOARD OPTIONS EXCHANGE was the first exchange (in December 2017) to provide futures trading in bitcoin. When a few days ago it announced it was terminating this service with the expiration of the June contract, severe selling of those still holding positions was expected to drive prices lower. That didn't happen. Trading was orderly with little changes in prices, which hovered just below the $1400 level that the market had been unable to surmount for several weeks. The next day the price sailed through $1400 and added another $29 before settling back below $1400. The fear of a debacle had vanished with optimism of higher prices, with $1500 cited by some as the next price target. That target was quickly hit on April 3, when the price shot up $1,000 in one hour and reached $1525 before settling back.

What happened? Attention was focused on the CBOE, but across town the Chicago Mercantile Exchange, which also had been dealing in bitcoin futures since December 2017, presented a different picture. On March 14, the day before CBOE announcement, almost $90 million worth of CME's bitcoin trading changed hands, compared to only around $8 million of CBOE's trading. But the CBOE story made the headlines, not the CME with more than ten times the trading volume and no problem.

Large swings in price are characteristics of not only Bitcoin but other cryptocurrencies. During part of 2011, the Bitcoin price dropped about 95%. It also dropped 85% between December 2013 and January 2015. The total market value of all cryptos is down about 85% from its peak in January2018. But Bitcoin has always bounced back from these huge declines and risen to new highs.

Despite discontinuing Bitcoin futures next June, CBOE expects to be involved in cryptos in some way. A spokesman said it is “assessing its approach with respect to how it plans to continue to offer digital asset derivatives for trading.” CBOE is owned by Intercontinental Exchange (ICE), which envisioned its participation here in crypto futures as a building block in a broader platform for trading and storing digital currencies and delivering metallic coins in the settlement of accounts. CBOE owns 18 existing exchanges, including the New York Stock Exchange. It planned to offer its crypto—called Bakkt—on the same exchange where it lists natural gas, cotton and coffee futures. The delay in launching Bakkt arose from disagreement with the regulator (CFTC) over how Bakkt should be regulated. Negotiations are continuing, including “warehousing” discussions related to Bakkt's responsibility for customer funds. But at least a dozen other companies are working on plans to launch futures trading backed by gold. So gold appears in the process of establishing an increasing presence in the cryptocurrencies.

If Bakkt or any other crypto is backed by gold, an interesting parallel arises with what happened on the Shanghai Gold Exchange. When the Shanghai exchange opened some years ago, it provided an opportunity for central banks to acquire gold without upsetting trading on the gold exchanges in New York and London, which deal mainly in trading futures contracts rather than physical gold. The banks didn't want to buy gold by dumping large amounts of dollars on the market since that would diminish the value of their remaining dollars. The SGE made it easy for banks to trade dollars for physical gold. If a gold-backed crypto can be bought with dollars, that will make it easy for millions of people to move dollars into gold. And in the long run, that could create pressure for making the dollar once again officially convertible into gold. In that case we will have come full circle back to a gold-backed currency.