To see how bitcoin is making the leap from the fringes to the forefront of finance, look to a firm called Akuna Capital. The trading shop could well be the first to buy and sell bitcoin derivatives in Chicago when they go live on Sunday (Dec. 10).
Chicago has been a trading hub for more than a century. News that two of the city’s global exchanges would create bitcoin futures—which allow traders to speculate on the cryptocurrency’s price at a later date—has fueled a boom in bitcoin in anticipation. It’s seen as a sign that major financial firms are about to embrace the decentralized digital asset. If it doesn’t self-destruct before the institutional money arrives, some think bitcoin could become a digital form of gold.
That’s where Akuna comes in. The six-year-old company was founded by a pair of Aussies who had worked at Optiver, one of the world’s biggest professional trading outfits for options. The proprietary trading firm (it uses its own money to buy and sell) is based at “Big Red” on 333 South Wabash Avenue, one of Chicago’s most recognizable office towers, and has about 160 employees. Some of them still trade over the phone, and others work from the shrinking trading floors that still exist in the city.
Like other traders, the company relies heavily on data scientists, mathematicians, and programmers to develop strategies. In addition to options, Akuna trades futures across a wide range of assets such as energy, agricultural commodities, currencies, and metals.
On Sunday night, Akuna will also post bids and offers for bitcoin futures. Other sophisticated trading firms, like DRW, which started an entire unit for digital assets in 2014, are eyeing the new derivatives listed by Cboe Holdings closely. But companies like Jump, another big Chicago trader, won’t necessarily commit to trading Cboe’s futures during those first minutes after launch.
You would think a professional trading firm would be immune to the bitcoin hype. Market makers like Akuna are like mercenaries, agnostic about whether something is over- or under-valued. They make money by posting bids and offers and profiting from the gap between those prices. Exchanges like Cboe and CME Group, which is launching bitcoin futures on Dec. 18 (pdf), rely on them to provide steady churn so investors always have a ready market for transactions.
Even so, Toby Allen, a partner at Akuna, says bitcoin futures are “super exciting,” and that the firm hasn’t experienced a product launch with as “much hype as this, ever.” The company has been involved in cryptoassets for less than six months, and Allen says the pace of change in that world is incredible. “We try to plan things out and three days later we have to go back and re-do whatever it is we’ve done,” he notes.
Given the speed of bitcoin’s take-off this year, there are concerns. Futures markets and derivatives exchanges like Cboe and CME are battle tested, but the exchanges where actual bitcoins are traded and held are vulnerable. They’re basically startups contending with immense growth; trading disruptions, withdrawal freezes, and hacks at bitcoin exchanges are fairly common.
The Gemini bitcoin exchange, which Cboe will use to price its futures contract, has had trading disruptions and issues, and auction volumes have dropped since August. That could open up its auction, where prices are determined, to manipulation, according to Craig Pirrong, a finance professor at the University of Houston. (The futures contracts are purchased and settled in cash, so buyers don’t ever deal in actual bitcoins.) Gemini didn’t comment before this article was published.
The less trading there is in the market, “the more susceptible it is to trade-based manipulations,” Pirrong says. And the less active the auction, the smaller the trades required to influence prices.
Futures exchanges could help improve the oversight of newer electronic markets. The US Commodity Futures Trading Commission (CFTC) says it expects Cboe and CME to monitor trading on crypto platforms for market manipulation, crashes, as well as trading outages. In the meantime, some major banks that backstop futures trading have objected to the launch of the contracts, arguing that bitcoin’s wild price swings could spark a dangerous default for market participants.
“The exchanges are looking at the underlying cash contract to make sure it’s not manipulated,” Andrew Busch, chief market intelligence officer at the CFTC, told CNBC. ”Our role as a derivatives regulator is to make sure the futures contract is not manipulated. We’re going to do that for sure.”
Objections from the banks’ lobby group aren’t expected to derail the launch of bitcoin futures, but could limit the amount of trading. And while other trading pros have also expressed worries about bitcoin’s price fluctuations, CME has pointed out that bitcoin volatility is comparable to fluctuations in VIX index futures, a widely traded financial derivative.
Allen at Akuna thinks the market is “crying out for futures.” He points to the Grayscale Bitcoin Investment Trust, a security that’s supposed to derive its value from bitcoin. The trust has traded at a 75% premium to bitcoin, a signal that financial professionals want a way to bet on bitcoin without having to deal with the risk (legal or otherwise) of actually holding the cryptocurrency. The premium suggests some investors still think bitcoin is under-valued, even after climbing from around $1,00 to more than $16,000 this year.
So what should investors expect on Sunday?
Allen says he’s watching to see whether bitcoin futures prices are higher or lower than the prices on actual bitcoin exchanges. It’s already possible to bet against bitcoin, but Cboe and CME futures will make shorting the digital asset much more accessible. This could give a better representation of investors’ opinions about bitcoin’s proper value.
In the meantime, Akuna, which trades bitcoin options on a platform called LedgerX, says it’s “heavily investing” in the trading of digital assets. For now, it’s pulling resources from other parts of the company and will grow its crypto team.
What does this mean for Chicago? Poet Carl Sandberg described the city as “Hog Butcher for the World, Tool Maker, Stacker of Wheat, Player with Railroads and the Nation’s Freight Handler.” Now it’s also a global hub for bitcoin trading.