Where Crypto and Commodities Meet
BTC and ETH have been in a relatively tight channel for the past couple of weeks, though both are showing signs of strength, with BTC prices back to the middle of the range between the all time high and the recent low. During this whole consolidation period, ETH has been the relatively stronger performer, and ETH prices are hanging right around their all time high as I am writing this.
While the attention of the world has been focused on coordinated trading organized over forums and social media, and what it might mean for markets as well as brokerages and their liquidity and capital requirements, markets have been on edge worrying about the effects of a global de-leveraging in equities and other risk assets. We’ve been on the lookout for tweets from Elon Musk or trending posts on Reddit, and when these have come up they’ve had brief but real market impact.
But, at least for the moment, it seems that the crisis has been averted. The anxiety that seeped into global capital markets in the last two days of January seems to have subsided, as February 1st came and went and the wheels kept spinning. So, today, instead of recapping what has happened or what I believe today’s risks are, I’d like to focus on a specific upcoming event, gearing up to potentially shake things up starting on Monday February 8th.
On that day, the CME will list futures on ETH for the first time.
On its face, that might not seem like a big deal. Its simply one more exchange where investors can have access to trading ETH. However, the CME is not just any other exchange: it is the worlds largest and most liquid futures exchange, and almost every hedge fund and institutional investor in the world (not to mention every semi-pro retail trader) is already set up to trade on CME. When the CME lists ETH futures, the barrier to entry for these players to at least dip their toe into the second biggest digital asset will be essentially zero. The ease and familiarity of trading on the CME platform, with trusted settlement procedures and central clearing, as well as built in leverage and predictable margin requirements, has drawn hedge fund managers such as Paul Tudor Jones to choose CME futures as the vehicle for his investment in BTC, which arguably was the start of this 10 month long bull run, spurred by institutional investment.
A look at history might make one take pause and get cautious ahead of the listing of ETH futures on CME. We only have one real data point to compare to, which is the listing of BTC futures in December of 2017. Anyone who has been paying attention can tell you that the introduction of BTC futures on CME was not exactly a positive catalyst. But, in this case like any other, context is everything.
In December of 2017 BTC was at the tail end of a parabolic run, defying logic in many trader’s eyes. At the time, mechanisms for taking the contrary view and putting on a short position in BTC were extremely limited, or even non existent, especially for US based traders and hedge funds. The moment that CME futures were listed, suddenly the ability to short BTC became as simple as making any other trade for hedge funds out there who thought that the market had gotten unsustainably hot.
Fast forward to today, and the landscape has changed significantly. Institutions have capitulated and embraced the idea that digital assets are here to stay. Access to these markets is increasing everyday, and the proliferation of digital asset infrastructure and finance has made it so taking short positions in crypto, while risky, is not particularly difficult from a logistics standpoint. Any hedge fund who has a strong opinion that these assets are overvalued and wishes to take a short position has that ability, with only a few hoops to jump through.
If context is everything, then the environment we’re in today is vastly different than in December of 2017. Digital assets are front and center in the minds of traditional finance players. Many banks and other industry players have been working on blockchain based solutions to improve efficiency in their businesses, and many of these solutions are built on the backbone of ETH. Today, there is no pent up demand wanting to short crypto, waiting in the wings for a product that will allow them to bet against prices. Today, there are large players who have decided that allocating at least a small percentage of their investments to digital assets is the smart thing to do, maybe even vital to their survival (or at least to keeping their jobs). Right now, those allocations are heavily weighted to BTC. I believe that there is a strong possibility that after CME lists ETH futures, we will see some of these players rebalance their digital asset allocation, adding ETH holdings to diversify their position while maintaining exposure to the asset class overall.
It is hard to predict the immediate effect of the listing on Monday, and it might take a little while for liquidity and volume to settle this newly born futures market. But I believe that the listing will usher in a wave of new institutional investment into ETH. Smart asset managers know to spread their bets, and they know that they should have exposure to ETH as well as BTC. I, for one, will make sure I’m right there with them.
CrossTower Inc. provides this content for general information purposes, to better inform you on your digital asset investment journey. We do not provide investment recommendations or provide tax advice. Please consult your investment professional or tax advisor if you require assistance in these areas.