Bitcoin Q&A: CME Bitcoin Reference Rate

Bitcoin Q&A: CME Bitcoin Reference Rate

[AUDIENCE] My question is about
[the Chicago Mercantile Exchange]. On December 10th, if I'm correctly informed,
the CME is going to start futures trading [of bitcoin]. Since this year, we have seen
already two forks, almost three. Forking is something quite new to a futures exchange;
the underlying assets usually don't fork. I haven't seen gold or oil contracts forking.
The implications can be quite heavy. For instance, on BitMEX, when the futures close on
December 31st, they are not going credit any 2X coins, so the futures were trading well below spot price. When the email was [sent about 2X being cancelled],
there was about [a five-minute period where]… you could [trade and] easily profit on that. How will forks affect the futures market? [ANDREAS] Okay, that's a really great question. I know a lot of people have questions
about the Chicago Mercantile Exchange. I'll tell you a few things about it.
First, I'll start with a disclaimer. I work on the oversight board of the Chicago
Mercantile Exchange's Bitcoin Reference Rate. I took this position eight or nine months ago.
It is unpaid, just in case you were wondering. Of course. The point of this is simple. Before the Chicago Mercantile Exchange embarked on
this idea of doing a futures market, one of the things… you need is the ability to have a consistent, predictable,
publicly audited reference rate, meaning a price. A price, both every 30 seconds as well as point price once a day, that you use to underpin the legal contracts. So if two people are disagreeing on what the price of
bitcoin was yesterday, they need a way to answer that, which is essentially non-reputable
and that they're both bound to. The Chicago Mercantile Exchange therefore started
this process by building these two reference rates. The Bitcoin Real-Time Index (BRTI) is a spot price that
updates every 30 seconds and gets published on… traditional trading feeds
like Bloomberg and Reuters. That allows a trader anywhere in the world to answer
the question: "What is the price of bitcoin today?" With a high degree of certainty. The other one is a point price, which
is [updated] every day at 2:00pm CT. It is a moving average taken at a point
in time that is considered the daily rate. The role of the Oversight Committee- I'm sorry, this is a long disclaimer, but it gives you
some context as to how these markets operate. The role of the Oversight Committee is to
create and oversee the application of rules… regarding which exchanges are used to
pull data about the current bitcoin price. We created these rules in a open public consultation,
that involved publishing the minutes of all our meetings, with three independent experts that
have nothing to do with the CME. I'm one of them, an Imperial College professor is
another, and a customer of the CME is the third. We published these rules. [One of them is that] you have to publish a price
consistently and not stop publishing a price. You [also need] to have trading fees. We immediately
excluded exchanges that did not have trading fees, because they can [potentially]
run bots that create fake volume. Out of these rules came that system. The part of the CME that is [running] the
futures market is completely unrelated to this. I found out about it on Reddit. They didn't
and couldn't tell me in advance, because… what we do is public and auditable, so I
found out about it [online like everyone]. I think it's fascinating. I think it's inevitable.
I think it was going to happen anyway. You've got to understand that this is a cash-settled market, meaning nobody holds actual bitcoin. For the CME to operate this market, they need to have
a corresponding long position for every short position. Both have to be capitalized in
U.S. dollars against the CME. CME customers, who have very strict requirements for
capitalization, have collateral deposited and audited… on a daily basis. That collateral can be used to take certain
positions, but not too-big positions. They can't go over their collateral beyond a certain level.
They have to be matched with buyers and sellers. They also have some trading circuit breakers, which
ensure that if the price of bitcoin drops or climbs… more than seven percent [in a day], they cease trading. Which means, at this point in time, they would be
ceasing trading three times a day. [Laughter] But hey, that's the tolerance of risk they could have. Some of the people who objected to [a bitcoin futures
market] were the traditional investors in the CME. They said, "This is too risky of an
investment to include in the CME," which is hilarious because the CME has
been in the business of managing risk… for 200 years, trading physical commodity
futures in very risky and volatile markets. The price of wheat is doing great, [then]
you have a drought that was unexpected, the price of wheat collapses, and now you have to pay out billions of dollars to
farmers who [took] positions in these futures markets. That's what they're used for. Who is going to short Bitcoin? That is a question
I get [asked] a lot, related to the CME futures. Who the hell would short Bitcoin? [Laughter] Well, there's a couple of options. When trading opens
on December 10th, we might see quite a lot of shorting. Part of the reason bitcoin is so volatile is
because you can't take a position against it. If it starts pumping, the price can really just go to
extreme heights without any downward pressure. It's unbalanced in that way, so who would short it? Maybe some traders and investment
banks, they're gonna short Bitcoin. They're going to do so at great risk, just like people
who try to short the stock market [bubble] right now… do so at great risk. I think the most interesting possibility is, the people who take short positions
with the least amount of risk are miners. Miners actually hold the underlying asset,
so unlike the people who are naked shorting, they're not naked shorting; they have the collateral
to make good on that option call if they lose the bet, without loss, and their risk is not unlimited. If I'm a miner, and I have to pay electricity [bills] next
month, I don't know what the price of bitcoin will be… and I'm earning bitcoin today,
that's a very risky position. If the price collapses suddenly, I may go out of business
— not because of profitability but because of cash flow. That's not a smart business. So I take 10% of my bitcoin
and I put it in a short position. If the bitcoin price does collapse,
that gives me a cushion, a margin. It allows me to recover some of my losses from the
price decline, so I can pay electricity [bills] next month. If I calculate my cash flow [needs] and operating costs, I could figure out exactly how much bitcoin I need
to short in order to have a good risk-reward premium. Basic market economics. If the price climbs tremendously, everybody who's
short loses their shirt and I'm losing on my 10% but I'm gaining on [the other] 90% of bitcoin that I hold. I can take that position with very
little risk and make money on it. I expect we're going to see miner participation,
in a big way, in futures markets. Well-capitalized, properly-managed futures markets. Some people say, "This brings legitimacy to bitcoin." As you may have known from watching some of my
talks, I am uniquely allergic to the world legitimacy. It makes me want to vomit when war-mongering,
war profiteering bankers use the word "legitimacy" to criticize Bitcoin. That takes a lot of audacity. In this case though, I think it's important to
recognize that the CME is not Wall Street. The Chicago Mercantile Exchange comes
from a 200-year tradition of mercantilism. There are people who trade in actual commodities. These markets trade not just oil, but probably their
biggest product is pork bellies, wheat, corn, ethanol, and hundreds of other commodities. Their primary purpose is to protect risk
for producers of these commodities. They're not the type of Wall Street mentality
that is about printing money out of nothing, and creating derivatives on top of derivatives. I don't think these people are as alien to our culture
as many believe. I've met a few of them. Before we go bundling all investment bankers
[together], I think it's important to recognise that. I have no influence or interest in the CME futures market.
I know it is creating a lot of interest. I think the period between December 10th
and December 31st is going to be very exciting; twenty-one days of extreme excitement. The most likely thing to happen is
we're going to see a lot of [trading] volume. You think we have volume in bitcoin now? [Laughter] When you watch a trader eat a sandwich,
while he presses 'Enter] on a $10 billion trade, you realize how small this game is. We're going to have a lot of volume, and that's not bad;
that is the first step to reducing volatility in bitcoin. That's what we need: massive liquidity.
I'm glad it was the CME that did it first.


28 thoughts on “Bitcoin Q&A: CME Bitcoin Reference Rate”

  • AlexaA Amsterdam. Growing your business faster says:

    Walking "all u Need 2 Know source! A true (un)polished multifaceted passionate Crypto diamond!
    Modern Robin Hood of Economy. Well educated, interested, experienced Metaphorical connecting our financial past and future from with passion!
    From Technical, Biological, Medical, Economical, Anthropological and IT perspective. Very enriching for navigating (financial) life! Greeting from Amsterdam

  • DeepOnion Italia says:

    Here we go: something has been changing! More and more people who knows what they are saying at public speaking and the "word" is spreading. Great talk by the way guys!
    In the 2018 anyway I'll take a shoot in private coin like Verge ,Monero etc..You definately want to bet your dollar in these sector..
    Interesting project that I've just checked lately is DeepOnion 'cause it is the first crypto developed on TOR Network. Just watch their site and tell me I'm I scam 😉

  • happenedtomorrow says:

    Hello Andreas. I think you are the Guru of the Blockchain:-) Now that Net Neutrality is gone (at least in USA) how does it impact on Bitcoin and its blockchain?
    Many say that Substratum is the answer! But I think Substratum will work as long as ISPs don't do "whitelist throttling".
    Do you think that use of other technologies like VPN or Tor can help sidestep this issue? I saw many innovations from the Cryptocurrency community to integrate with censorship resistant networks like Tor or I2P are underway. Among anonymous crypto-currencies I've found DeepOnion to be the best one, do you know it?

  • Michael Howard says:

    Andreas mentioned something quite pro-found when discussing how all of the physical material in our body will by changed out, yet we are still the same person because the pattern is the same.  That would be the same for cryptography that makes the value of your bitcoin unique and unable to duplicate.  It could be the same with us and it is not the material aspect of us but possibly a cryptographic pattern that uniquely defines us and can not be duplicated. That would make us eternal as long as the pattern is not lost and our physical self defines a location for us to interact, like a hardware wallet. When we die we kind of end up in cold storage.

  • I was very excited to see the launch of Bitcoin futures, after a month I must say my bullish expectations for BTC have been crushed. It seems like more people than ever before are seeking an alternative for investment or simply daily use.

    Myself I prefer to use Litecoin or DeepOnion (fascinating project) for daily transactions and I feel like the market is at a turning point, where BTC become more and more institutionalized, stable and smart money start to seek better returns in the low market cap cryptos. What do you think ?

  • One of the best resource speaker ive heard & seen in the long time, No Hype just pure information and kwowledge about Bitcoin Futures.

    I am looking forward in seeing ethereum, XRP and other Cryptocurrency Underdog like ETN,Tron, DGB and DeepOnion in the CME future's market Exchange.

  • I think I could listen to you all day! You are so knowledgeable! Which exchanges do have 0 fees? I didnt know anything like that exists? I have a question for you – what is your view on privacy coins like Verge/DeepOnion/Dash ? I've been investing in some of them because there seems to be a lot of hype on anonymous coins. Do you see these overtaking BTC at some point or will BTC somehow evolve? Thanks

  • this is the problem when you upload clips, then I'm watching this video and realize I already heard this from another video on this exact same channel. I don't like watching the same stuff over and over unwillingly. So unfortunately this devalues all the content on the channel and makes me less likely to watch any future videos. 🙁

  • Great days comming for crypto overall.Bitcoin as a futures is step to wide adoption. What I do not like in Bitcoin is that it is not anonymous and goverments start taking actions in several countries to people using and trading bitcoin. Thats why I am totally shiffted to anonymous coins, I see mass hype recently about them. I would like to see your view on them in some of your videos. XMR, recent Verge surge (MCafee pump) and especially Deeponion. I think this will be huge in 2018. They have supperior technology in terms of anonymity and 100% untracable. TOR based with very unique features like Deepvault and Deepsend. Please do check it out in some of your videos. They are releasing their whitepaper soon and woocomerce plugin for acception ecommerce payments. I think this will be huge

  • I think that futures on Bitcoin will amplify the speculative game…it's not a good think in general…i am very confused by the whole situation around Bitcoin at the seems like the whole game is in the miners hands…and i see no direction at all for BTC…indeed i have noticed that privacy coins are growing fast recently..maybe because investors prefer to move their money into something that looks more safe and that can offer a better future than BTC…for instance Verge, DeepOnion, Hush, Bulwark, Navcoin have all grown a lot in the past days..especially and DeepOnion and Verge..
    i would like to know your opinion about privacy coins in general..

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