Institutional Investors Are Swapping Bitcoin Futures for Physical BTC ๐จ This article is 6 years old...
Institutional Investors Are Swapping Bitcoin Futures for Physical BTC
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Updated: Apr. 6, 2020 at 1:19 am UTC
Photo by Joel Filipe on Unsplash
Gaining momentum in its recent price rally, Bitcoin is increasing institutional investor interest. During the last week of July 2018, Wall Street traders completed their first-ever Bitcoin futures swap for physical BTC.
Exchange for Physical (EFP) Crypto Transactions
In a major stride for Bitcoin mainstream adoption, two institutional investors completed the first-ever exchange for physical (EFP) transaction with CME Group Bitcoin futures earlier this week.
Registered futures commission merchant E D & F Man Capital Markets and itBit cryptocurrency exchange facilitated the CME EFP Bitcoin transaction, allowing two traders to swap a CME Bitcoin futures position for an equal amount in the underlying digital asset itself.
EFPs allow institutional investors to hedge commodity and futures positions and diversify portfolio exposure to different assets, often providing firms with capital, tax, or liquidity benefits. EFP transactions are privately negotiated and only reported to the exchange for the settlement.
EFP transactions have existed as a common financial instrument in the commodities and futures markets, but they have never been used to process a U.S. futures swap where the underlying asset is Bitcoin.
Brooks Dudley of E D & F Man Capital Markets Inc commented on the trade in an interview with CCN:
โEvery day we facilitate EFPs for our clients in physical assets such as soybeans, wheat and treasuries. EFPs on CME Bitcoin futures mark an important step forward in the maturity of the regulated derivatives market for digital currencies.โ
The continued rise of institutional solutions lower the barriers to entry for investment firms and hedge funds awaiting a regulated market for digital asset products.
Until now, the U.S. Commodity Futures Trading Commision has only approved cash-settlements of Bitcoin futures โ meaning that traders can only receive cash when their futures contracts expire. The introduction of a cryptocurrency-enabled EFP will likely reduce friction in digital asset to mainstream market transitions.
Institutional Investment Solutions on the Rise
Earlier this month, CME revealed that Bitcoin futures average daily trading volume in Q2 2018 grew 93% from the previous quarter โ indicating a significant rise in popularity for Bitcoin futures trading. The CME Group began offering Bitcoin futures on Decemberย 17, 2018.
San Francisco-based virtual currency trading platform Coinbase secured a $20 billion hedge fund through its prime broker on July 19, 2018. Coinbase plans to give institutional investors access to a greater variety of financial services, such as margin financing for cryptocurrency investments.
On June 26, Cboe futures exchange submitted a Bitcoin ETF application to the U.S. Securities and Exchange Commission (SEC).
If approved, the Bitcoin ETF proposal could catalyze an influx of institutional capital into the cryptocurrency sector and mark the second regulated digital asset product to list on public markets.
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