Eugene Grygo, Chief Content Editor, FTF News
As I’m writing this piece, The Wall Street Journal is reporting that the price of bitcoin currency is hitting a new high: “The price of bitcoin crossed $13,000 on Wednesday afternoon, the latest milestone in the cryptocurrency’s massive rise.”
We are having a moment with Bitcoin, which strangely follows the securities industry’s fascination with the blockchain/distributed ledger technology that makes bitcoin work. The DLT infrastructure is easier to understand than the currency it is facilitating.
To recap, the price surge has likely been helped via the recently announced efforts by the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange’s (CBOE’s) Futures Exchange (CFE) and the New York-based Cantor Exchange to offer futures and options instruments. Despite the concerns of the CFTC and National Futures Association (NFA), these exchanges are slated to go live next week with their bitcoin-based contracts. Sadly, the prudent concerns did not garner the hot headlines and attention.
The core of the concerns of the CFTC and NEA are the mysteries that swirl around the cult following of bitcoin (lower case when referring to currency, upper case when referring to the concept behind it). They and many others are worried that we are seeing a new, speculative bubble that could really hurt.
So, first, what the heck is a bitcoin? And is it the Savior that its followers predict it will be? Well, let’s go back to basics.
The bitcoin organization, offers some of the basics and a helpful video explains how this digital currency gained ground and how it might disintermediate clearing, settlement and other financial services that rack up fees for providers. Investopedia also offers an explanation geared toward those working in securities.
In addition, Coindesk offers a helpful piece from 2014: “Still Don’t Get Bitcoin? Here’s an Explanation Even a Five-Year-Old Will Understand.”
To recap, bitcoin is a digital currency, which means that it is supported by hardware, software, networking, and cryptography. A “bitcoin mining” process helps advance the currency.
Bitcoin’s Secretive Past
“Bitcoin is a digital currency created in 2009. It follows the ideas set out in a white paper by the mysterious Satoshi Nakamoto, whose true identity has yet to be verified,” adds Investopedia. “Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralized authority, unlike government-issued currencies. … There are no physical bitcoins, only balances kept on a public ledger in the cloud, that – along with all bitcoin transactions – is verified by a massive amount of computing power. Bitcoins are not issued or backed by any banks or governments, nor are individual bitcoins valuable as a commodity. Despite its not being legal tender, Bitcoin charts high on popularity, and has triggered the launch of other virtual currencies collectively referred to as Altcoins.”
I still have problems with the concept of any digital currency especially a “crypto currency” because it’s not clear to me what the inherent value is. I also have doubts that a global IT system can effectively maintain the integrity of bitcoin currency.
For lack of a better example, gold worked as the basis for the U.S. dollar at one time because, in theory, a person could bring their paper dollars and get an equivalent amount of a precious metal that will last until the end of time. Of course, the exact amount of gold could fluctuate widely because of inflation, depressions great and small, and other economic factors and conditions.
In the case of a bitcoin, how can you determine its true value when that is obscured and protected by cryptography? In addition, its meteoric rise is harming its usage as a payment system.
For now, the industry is holding its breath to see how the futures and options instruments fare. If they do well, then bitcoin may become a new trading instrument that operations staffs will have to manage and maintain after the glitter fades.
If these instruments do not catch on, will the industry learn its lesson?
Need a Reprint?