Page 67 - The Economist20171214

The Economist December 16th 2017 Finance and economics 67
Futures contracts in bitcoin highs (see chart), holders may be happy to
Blooming futures? have a way to hedge their exposure at last. Into the futures
But for many, the contracts are just another
$ per bitcoin
way in. Both contracts settle in cash (ie, for
the difference between the agreed price 18,000
and the actual spot price). No exchange of 15,000
bitcoin is needed; similarly, in the Dutch
12,000
precedent, no bulbs were involved.
Futures contracts in bitcoin create as Earlytradingon the CBOE certainlysug- 9,000
manyrisks as theymitigate
gests a speculative market. In the first few 6,000
FTENpromoted asa wayofmitigating hours, prices rose so quickly that trading
Orisk, futures contracts are frequently twice had to be suspended. The contract 3,000
more like new ways ofgambling. That was has so far traded at a significant premium, 0
true ofa close precursor to the instrument, of up to $2,000, to the spot price. This sug- Jun Jul Aug Sep Oct Nov Dec*
introduced in the Netherlands in 1636, gests there are more buyers than sellers— 2017
linked to the hotinvestmentofthe day—tu- even though selling in the futures market Source: Bloomberg *At 8am Dec 14th
lip bulbs. Likewise the world’s first two fu- offers a way to bet against bitcoin.
tures contracts linked to bitcoin. One It may be that investors are willing to And hackers stole bitcoin worth $64m (at
launched on the Chicago Board Options pay some premium to evade the mounting the time) from a Slovenian exchange.
Exchange (CBOE) on December 10th; the hassle entailed in buying bitcoin. In recent Butthe futurescontractshave problems
otherwasdue to followa weeklateron the days, many bitcoin exchanges have seen of their own. The CBOE’s price is set by an
Chicago Mercantile Exchange (CME). systems failures. Also, prices have differed auction on just one modestly sized bitcoin
As bitcoin’s price has soared to new between exchanges by as much as 25%. exchange, Gemini. The CME’s price, in con-
trast, will be based on an index compiled
from data from four exchanges. The collat-
Investing in collectables
eral, or “margin”, required for clearing the
The passion index contracts highlights their riskiness. The
CBOE contract requires 44%; the CME first
announced it would charge 35%, but then
NEW YORK revised the figure to 47%. On most futures,
Handsome rewards awaitthose who can afford the finestluxuries
margins are around 5-15%.
IAMONDS, they say, are forever. grew to $63trn, accordingto Capgemini, a ThomasPeterffy, the head ofInteractive
DThey can be pricey, too. On Decem- consultancy. It forecasts that HNWI Brokers, a large brokerage, warns that there
ber5th173 lots ofjewels auctioned by wealth will surpass $100trn by 2025, with could be a risk to clearing-houses them-
Sotheby’s raised $54m. They included about10% invested in collectables. selves. Bitcoin, he points out, “can reach
several pieces belongingto Sean Con- Caution is advised. The returns from anyprice”. Ifbitcoin futuresare taken up in
nery, known forplayingJames Bond. The collectables may be hard to realise. First, large numbers, bitcoin prices rise far
followingday a carfavoured by Bond, the the indices do not reflect the true cost of enough and end-clients are not able to put
Aston Martin DB5, was auctioned for investing: insurance, storage and upkeep up more margin, brokers will be on the
$2.7m. It was among24 classic vehicles are all costly. Second, unlike shares, items hook; a big enough rally could mean small
that togetherfetched $45m. The sales in in ourindexare neithervery liquid (ex- brokers run out of money. This would
New Yorklast weekby the world’s two cept wine) norfungible (the goods are leave the clearing-house responsible for
biggest auction houses, Sotheby’s and rarely interchangeable). When a quick unwinding the contracts, a difficult task if
Christie’s, also involved fine wines, sale is sought—often caused by debt, the margin for bitcoin contracts is mixed
watches and otherluxuries. Between death ordivorce—biglosses can be in- with that from other contracts, as now. Mr
them they sold $200m-worth. curred. Finally auctions, the basis for Peterffy thinks exchanges need to clear bit-
The Economist has compiled price many ofourindices, may inflate the coin futures in a separate legal entity.
indices formany ofthese items—dia- market thanks to reserve pricing. Unlike Others share his concerns. In a rare
monds, classic cars, fine wine, art, watch- last week’s glamorous showing, losses open letter to the Commodity Futures
es and othercurios—and grouped them are often booked quietly in private sales. TradingCommission (CFTC), America’s fu-
in a “passion” index. The indexis weight- And you cannot settle in bitcoin. tures regulator, the Futures Industry Asso-
ed accordingto the holdings ofhigh-net- ciation (FIA), a global trade body, criticised
worth individuals (HNWI)—defined as the exchanges’ use of a self-certification
people with more than $1m ofinvestable Life in the fast lane processforthe newcontracts. Itargued that
assets—as reported by Barclays. Our Passion investments, Q1 2007=100 this did not leave room for a debate about
passion indexhas dropped by 2% a year, appropriate safeguards and whether sepa-
400
on average, forthe past three years. But Cars rate clearing was needed. Ed Tilly, boss of
since the beginningof2007 it has re- the CBOE, says accusing his firm of sneak-
turned 5.9% on average, outperforming 300 ing in the new contract unnoticed is unfair.
Diamonds and Passion
the total return from the MSCI world, a jewellery index It has been discussing bitcoin with the
global stockmarket index. 200 CFTC formonths (as has the CME).
Passion investingmay help hedge Despite the unease, many brokers are
otherbets: art tends to be inversely corre- 100 helpingclientsuse the newcontracts. Opti-
lated to stockmarket indices, forexample. MSCI World mists hope that bitcoin futures will be-
The supply ofmany collectables is fixed; 0 come well-established and even make un-
demand forthem is growing. The num- 2005 07 09 11 13 15 17 derlying markets more robust by
berofHNWIs rose from11m to16.5m from Sources: Art Market Research; Classic Guitar; FCRF; HAGI; dampeningvolatility. Pessimists recall that
2011to 2016 and theircollective wealth Liv-ex; Stanley Gibbons; Thomson Reuters; QBI the tulip-futures innovation of1636 did not
stop the tulip-bulb crash of1637. 7