JP Morgan sees a promising future for bitcoin derivatives market

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Key facts:

  • Bitcoin futures offer much higher returns than fiat currency investments.

  • Demand would grow with a regulated fund that sells shares and tracks the price of the cryptocurrency.


Bitcoin offers higher returns than those offered by any fiat currency investment, as well as gold and silver, JP Morgan found in research related to the cryptocurrency futures market, where analysts discover a promising future.

The investment bank's paper notes that while most fiat currencies are offering an annual return of about 5%, bitcoin futures secure an annual gain of up to 25%. An observation that could pique the interest of many, especially if the claim comes from a major traditional financial firm.

The report details that, the performance of bitcoin futures contracts is so high because it is difficult for markets to obtain an estimate of the cryptocurrency price and consequently results in additional risk when institutional investors fund their positions. As a result, a premium arises between the derivatives market and spot prices.

In this regard, the JP Morgan research team points out that, the Chicago Mercantile Exchange (CME), which has the largest trading platform for bitcoin futures, prices the cryptocurrency by referencing several different exchanges. But this price was inaccurate by an average of 2% per day and these errors add up to at least 10% per year.

That error rate is, then, one of the reasons for the high performance of bitcoin futures, the analysts comment in their report, according to data shared on Twitter by Dylan Declair.

In addition to errors, it is also difficult for institutional investors to access bitcoin through the few options available to the market, such as CME and Grayscale. The market's own volatility should also not be overlooked, which is why "in these circumstances, one should expect a significant risk premium with a price in futures", the report points out.

A bitcoin ETF would drive institutional adoption

The launch of a bitcoin and other cryptocurrency exchange-traded fund (ETF) in the United States could make things easier for investors and in turn drive adoption, analysts add.

With a regulated fund selling shares and tracking the price of cryptocurrency with greater accuracy than that offered in the futures market, "it would presumably be easier for prime brokers to take those securities as collateral", the report adds.

From what they say, it is understood that with an ETF it would be cheaper to bet on the future price of bitcoin, because the premium that currently exists between the price of the derivative and the spot price would be reduced. So, by lowering the premium, more investors would be motivated to take some position in the bitcoin futures market, which would boost demand.

However, there is no certainty when the launch of an ETF that has approval from the U.S. Securities and Exchange Commission (SEC), which has so far rejected several applications, would occur.

In recent weeks, more and more requests for approval of bitcoin ETFs are coming to the SEC. In fact, major companies such as Goldman Sachs and Fidelity Investments have applied recently. Even the firm Grayscale has plans to convert its cryptocurrency mutual funds into exchange-traded funds.

In fact, SEC member Hester Peirce has criticized the SEC's strict regulatory policies around approving a bitcoin exchange-traded fund (ETF). She has further said that the constantly changing targets and requirements imposed on applications are unfair to innovators.

"The SEC's reluctance to permit traditional investment vehicles associated with bitcoin or bitcoin futures has contributed to investors seeking more expensive, less convenient or less direct substitutes", she said.

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