This is the headline we should be reading right now. The CFTC’s approval to let CME, CBOE, and Nasdaq list their Bitcoin products on the exchanges is the most ridiculous and dangerous decision I have ever seen in my life, and I’m a HUGE Bitcoin advocate. I know LedgerX has been approved for a couple of months now, but that exchange does not have the same reach that the CME, CBOE, and Nasdaq possess. CFTC’s lack of oversight and inability to do their job correctly, even by approving LedgerX, has just allowed the most classic type of fraud to occur. On top of that, the CFTC is putting market participations at risk and have amplified the systemic risk to the point of catastrophe. How did you ask? Well, there are 3 main reasons, which I have highlighted below.
Responsibilities of the Commodity Futures Trading Commission:
By definition, the stated mission of the CFTC is “to foster open, transparent, competitive, and financially sound markets, to avoid systemic risk, and to protect the market users and their funds, consumers, and the public from fraud, manipulation, and abusive practices related to derivatives and other products that are subject to the Commodity Exchange Act.”
- “To protect the market users and their funds, consumers, and the public from fraud”
How can the CFTC say that they are doing their job of protecting consumers and market participation by approving these Bitcoin Futures products? The CME, CBOE, and Nasdaq are on the verge of creating TRILLIONS of dollars worth of Bitcoin derivatives from just 16 million Bitcoins in circulation. However, it is estimated that of the 16 million, 4 million have been lost due to human error, so essentially these Bitcoin derivatives are deriving their value from assets that do not exist. Anyone else see a problem with this? In other words, the CFTC approved the act of fraud by the exchanges because they are offering derivatives of financial products that do not exist. This is the most classic definition of fraud.
- “To foster open, transparent, competitive, and financially sound markets, to avoid systemic risk”
Due to Bitcoin’s private nature, an investor cannot short Bitcoin in the traditional sense because it would be impossible to locate or deliver the Bitcoins to the trader. However, in its place, the exchanges are offering fiat settled derivatives, which as every trader knows has no material impact on the underlying asset. How is this an attempt to create a financial sound market? Fiat settled derivatives are basically a circus and expose investors to systemic risk. I say shame on the exchanges and the CFTC for their lack of oversight. Do your job properly.
- “Abusive practices related to derivatives”
The ill-advised decision to approve the Bitcoin products from the CFTC has just opened Pandora’s box. How long do you think it will take for the exchanges to offer derivative products from the other 1300 cryptocurrencies on the market? Don’t forget to consider that 90% of these 1300 cryptocurrencies have absolutely no utility so effectively have no value at all. Does this sound like abusive practices to anyone else? The CFTC and the exchanges are amplifying any type of misstep or error by a magnitude of 10, but it will be exposed to a much wider audience that it has been in the past.
Learning From History:
Every single one of these 3 reasons listed above could have major implications for millions of investors. However, you’d also be a fool to think that the launches of these products are going to be smooth. An event of this magnitude and the short turn around built in by the exchanges will definitely cause major ripples on their networks, potentially leading to glitches or hacks. I would like to take you back in time and provide you with an example. Anyone remember Mt. Gox? When the site Mt. Gox, which was the largest Bitcoin exchange in 2013, got hacked the price of Bitcoin started plummeting. Why? There were so many misinformed people participating in the market that it lead many to believe that it was actually Bitcoin that got hacked. However, as many of you know now, that just isn’t possible. It was actually the Mt. Gox site that was breached, and hackers made out with millions in Bitcoins. So, what will happen when all the uneducated investors from the stock market start plowing money into Bitcoin products, only to have one of the exchanges face a major glitch? I know! There will be major instability that will lead to chaos.
Letting the Market Mature:
The Bitcoin community has made tremendous strides since its inception in 2009. However, the fact remains that the market is still in the process of maturing, but is definitely heading in the right direction. For example:
- There has been a reduction of volatility. Since 2015, one-day swings are largely within 15%
- Increased liquidity and information efficiency. Bid-ask spreads are one-tenth of the value from 2013
I am very proud of all the progress the Bitcoin community has made, but right on cue the bankers and our current financial system have arrived to ruin our progress. I’ve clearly defined and discussed not only how the CFTC will endanger investors, but also how their indiscretions will translate into villainizing Bitcoin even further. Someone at the CFTC needs to be fired immediately!