A UBS economist says that CME Group’s plan to launch bitcoin futures contracts mirrors Tulipmania in 17th-century Holland.
As CCN has reported, Chicago derivatives exchange operator CME Group has announced plans to provide its clients with bitcoin futures contracts before the end of the fourth quarter. In addition to luring Wall Street capital into bitcoin-related products, the creation of bitcoin futures will likely lead to the first commercially-available Bitcoin ETF.
However, not everyone is excited about bitcoin derivatives. UBS economist Paul Donovan told CNBC that he sees dangerous parallels between the structure of CME Group’s bitcoin futures and the crash of the Dutch tulip bubble in 1637.
The tulip bubble comparison has been hashed and rehashed on multiple occasions, and as CCN has explained in the past, it is inaccurate. However, Donovan introduces a new dimension to the argument by focusing his criticism on the similarity between the proposed bitcoin futures contracts and the tulip futures that contributed to the collapse of the tulip market in Holland.
Specifically, he points to the fact that the futures will be cash-settled rather than commodity-settled. Ordinarily, the way a futures contract works is that a buyer and a seller agree on a price for a commodity that will be delivered on a certain date. Professional traders buy and sell these contracts to place bets on the future value of the underlying commodities, and whoever owns a contract at its expiration receives physical delivery of the commodity.
However, CME’s bitcoin futures will be cash-settled, which means that cash will be delivered upon contract expiration rather than bitcoins. Donovan says this mirrors the creation of cash-settled tulip futures in Holland in 1636 – just one year before the tulip bubble popped.
"The idea of not physically delivering the product was rather shocking to contemporaries (as it turns out, the market crashed before bulbs could have been delivered anyway – bulbs were lifted in June 1637 for physical delivery). Traders met in groups (in taverns), called 'Colleges.' Think of the taverns as the cryptocurrency exchanges of their day," Donovan said.
Donovan is not the only person at UBS to express skepticism about the future of bitcoin. Just last month, the investment bank published a research paper referring to bitcoin as a “speculative bubble”. Nor is he the only critic of CME's launch of bitcoin futures. Themis Trading principal Joe Saluzzi said that the exchange was "playing with fire" and said that the products reminded him of the collateralized debt obligation (CDO) products that contributed to the 2008 financial crisis.