Cboe's about-face on bitcoin futures doesn't mean institutions aren't interested in crypto derivatives

There's nothing like harking back on the halcyon days of the Cboe bitcoin futures launch in December 2017.

Then, market observers said the launch, which was closely followed by the roll-out of CME's bitcoin futures product, would lure in a massive wave of institutional capital from investors looking to trade in the market, but who might have been too timid to trade actual crypto.

Others said it could help push the Securities and Exchange Commission to approve an exchange-traded fund tied to the digital currency. 

Chris Concannon, then president of Cboe, teased reporters about the launch of new contracts tied to ether, litecoin, and bitcoin cash.

Of course, as we know thanks to sweet hindsight, market pundits and financial media were off about how fast the market would mature.

Fast forward to last week. Cboe announced relatively quietly that it would pull the plug on its futures product later this year.

And once again the market was quick to brush wide strokes. This time, however, they connected the news to a decline in institutional interest. 

That analysis misses a lot of context, however. To be clear, Cboe isn't completely throwing in the towel, according to the notice it put out Thursday. 

"CFE is assessing its approach with respect to how it plans to continue to offer digital asset derivatives for trading," the exchange said. "While it considers its next steps, CFE does not currently intend to list additional XBT futures contracts for trading."

The fact that they are addressing their position in the market stands to reason at closer examination. Cboe has been getting crushed by its rival CME Group, as I Am Nomad, a Twitter personality and friend of The Block, pointed out in a thread last week.

"Cboe clearly lost the battle of the bitcoin futures and needs to re examine things to be competitive," he wrote. In December 2017, CME and Cboe both traded less than $1 billion worth of contracts, with Cboe trading slightly more. During Friday's trading session, CME had 5X the volumes of Cboe for bitcoin futures. 

Overall, CME has seen its market grow by 220% year-over-year. 

In addition, competition is heating up in the crypto derivatives market. Bakkt, the crypto trading platform backed by Intercontinental Exchange, Seed CX and ErisX are all set to offer their own bitcoin futures contract in 2019. Asia-based CoinFLEX announced the launch of a new futures marketplace earlier this year. 

Ron Bernstein, general manager at Coinbase, said at an industry conference in Boca Raton, Fla. that his firm is exploring derivatives trading "in a couple of different ways," without mentioning any specifics. 

Indeed, Adam White, COO of Bakkt, said at the same conference that the derivatives market is set to become even more important to the cryptocurrency market. 

"Right now we look at price discovery happening primarily on the cash market and those cash markets are bifurcated between traditional OTC players like Cumberland and Circle and Genesis but also the lit cash markets like Coinbase and Gemini, Kraken and I think those markets are really important," he said, referring to the area of the market that determines the proper price of bitcoin. "We are going to see in time it is going to switch into the futures market."

"We are starting to see some of that price discovery I think moving to the futures market," Tim McCourt of CME, another panelist, added. 

In a conversation following the panel, ErisX CEO Thomas Chippas, said market participants have been waiting for a trusted venue on which they can trade in both futures and spot cryptocurrency markets. 

"I would say is a reference back to what I said on the panel, which was that we really think there's a substantial base of potential interested trading parties that aren't in the markets today because they want to access these assets and cryptocurrencies via platforms they already trust."