It's probably a generational thing ..... in fact, it's definitely a generational thing. For those still struggling to get their head fully around the principle of cryptocurrencies, investment (if you could call it that) in that area is obviously a no-no. "More fool you !" cry the enthusiasts, pointing to the stratospheric returns that they may or may not have already realised. But even for a good number of those who understand how it all works, the rocketing price of cryptocurrencies smacks of a huge bubble waiting to burst and for them, jumping on the Bitcoin bandwagon for example would not be an investment but a highly speculative punt fraught with excessive risk. Of course, they would have been saying the same thing a year ago when Bitcoins were trading below $1000 a pop, and they're now above $8000.
You don't have to be a natural sceptic to be hugely wary of this kind of thing ..... playing with fire is not the normal modus operandi for most portfolios. But if cryptocurrencies scare you, how do feel about the prospect of futures markets on cryptocurrencies ? The Chicago Mercantile Exchange is about to launch its Bitcoin Futures contract, probably next month.
Now don't get us wrong ..... generally speaking, we are fans of futures markets. If managed correctly (which is key), the leverage and access to markets that they offer to risk-hedgers and speculators alike is a very good thing. But there is something a touch worrying about someone saying : "Here's the most volatile "commodity" imaginable ..... let's trade it in a market-place that allows punters to trade large notional amounts of it for a much smaller initial deposit, or margin." That can only increase volatility, and of course leverage, or gearing, works both ways ..... as many punters in futures markets have found out over the years. It multiplies profits on your "investment" many times if you get it right (and can afford any reversals in the meantime), but it does the same for losses. One assumes, hopes even, that the initial margin requirement for the Bitcoin contract will be pretty onerous by the standards of most futures contracts ..... in this instance, it's a case of the less leverage, the better.
Actually, that wasn't really the reason why we alighted on the subject in the first place, and it certainly isn't the thrust of the Bloomberg piece. Matt Levine asks us to imagine a certain scenario, and wonders whether there might be serious legal problems for some major players down the line if the three elements of the scenario all come to pass. For the purposes of this exercise Mr Levine puts the spotlight on JP Morgan and its CEO Jamie Dimon, but the question hangs over any number of institutions.
Anyway, imagine that :
1. Bitcoin futures open on the CME (just about guaranteed)
2. JP Morgan Chase & Co.'s futures brokerage arm offers trading access to the Bitcoin contract to its institutional clients (highly likely)
3. The market decides Bitcoin is a sham, the bubble bursts and the price collapses (certainly possible)
Now, we have to remember that the very high-profile Mr Dimon has gone public more than once with his view that Bitcoin is nothing but a case of "Emperor's New Clothes" and that sooner or later element no.3 will happen -- the whole thing will turn to dust. If he's right, bearing in mind element no.2 -- which includes JP Morgan buying Bitcoin futures on behalf of customers -- will those customers who lose their shirts sue JP Morgan for facilitating the purchase ? And if it does get legal, will the opposition briefs take the line that JP Morgan knew Bitcoin was a sham -- we know that because the CEO kept saying so -- so why did they push Bitcoin futures onto our clients ?
Where it all might end is anybody's guess. Congressional hearings ? Mr Dimon testifying before a Senate committee and being asked why he sold Bitcoin to clients if he thought that people who bought Bitcoin were "stupid " ? Mr Dimon would doubtless argue that institutional clients are big enough and ugly enough to look after themselves ..... "we were only fulfilling client's orders and it matters not a jot what our own views are. Most of them wouldn't care what our views are, which is just as it should be."
Actually, so long as his company was only performing an execution role and no encouragement was given on the buy-side, he'd have a very good point. Trouble is, the big banks argued something similar in 2010 about selling mortgage bonds in lead-up to the financial crisis. It's a stance that didn't get much support from the Senate then and isn't likely to get much more now. Even with a more bank-friendly administration in the White House, one that might be less demanding about regulatory matters than its predecessor, "Mis-selling" will remain a very touchy subject indeed ..... even if you're not guilty of it.
There are some fundamental questions at play here about what exactly is the nature of an investment bank. Is it an adviser, or is it a facilitator .....a broker and mediator, if you like ? Or is it a combination of both, in which case it would seem as though there's still some way to go to sort out the delineation between roles. Whatever the case, after the experience of recent years one might expect banks to err on the side of caution.
Mr Levine has plenty more to say about matters Bitcoin ..... including thoughts on the irony that the futures contract will be settled in dollars. If you buy the futures to make money (and win), your profit will be in dollars. If you really believed in Bitcoin, you'd just buy Bitcoins. Well, that's a little simplistic but we take his point ..... the need for Bitcoin futures, or a Bitcoin ETF, come to that, is in fact an argument against buying it. You can think a bit too deeply about whether buying Bitcoin instruments is a show of support for a new system or just a way of making money in the old one. Don't expect the punters to care too much about such issues if they end up with fistfuls of dollars.
One last point ..... the price of Bitcoin has just about doubled since Mr Dimon first gave his opinion on the subject. Obviously, with the benefit of hindsight his timing looks poor but with Bitcoin now at $8,135, are his warnings less relevant, or all the more so ? Discuss .........