Noelle Acheson is a veteran of Business Analysis and Director of Research at CoinDesk. The opinions expressed in this article are those of the author.

The following article originally appeared in Institutional Crypto by CoinDesk, a weekly newsletter devoted to institutional investments in cryptographic assets. Sign up for free here.


Earlier this month, Heath Tarbert – the new chairman of the US Commodity Futures Trading Commission (CFTC) – said that Ethercha, a blockchain brand, was a commodity.

This is an important statement from the regulator of one of the world's largest derivatives markets. Why? Because it opens the door to the possibility of regulated ether derivatives in the near future. The president was even more specific: "I would say that it is likely that you would see a futures contract in the next six months to a year."

The market was excited because it would increase the attractiveness of the token for institutional investors. Derivatives allow hedging, which is an important part of portfolio management and a solid support for long positions. The reasoning is that a dynamic derivatives market will encourage more investment, which will drive up prices, encourage more investment, and so on.

However, with all due respect, I think the chair is wrong. We will not see a future for large volume ether futures in a regulated US market. If ever.

Reputation risk

Although it's not just the lack of demand, let's look at it first.

Ether futures are currently traded on exchanges outside the US, but volumes have been limited relative to the spot market. On BitMEX, Huobi and Deribit, three of the largest cryptographic platforms offering ether futures, the average 24-hour volume is less than 10% of that of bitcoin, while the equivalent ratio in the spot market is almost 25%.

The difference could be due to the relative youth of ethereum, and the gap could be smaller as the network grows. Or, bitcoins may still be the asset of choice for institutions, making the demand for ether derivatives too insignificant for large markets to grow profitably.

In both cases, the demand can be flexible. The real obstacles to a successful launch of the ether derivatives go much further.

Underlying risk

Last week, Ethereum developers announced the target date for the next system-wide upgrade: December 4. This one will be executed via a direct connection, in which all the ecosystem must be modified – the blocks treated on the old version will not be valid on the new version. . There are many to come.

This introduces an additional element of risk into the market. Earlier this year, an upgrade had been delayed just 48 hours before its launch, due to a "critical vulnerability." Even if it is extremely likely that bugs will be detected and resolved in time, there is always the "what if?" "On which risk takers need to focus.

The upcoming consensus algorithm change is even more worrisome for ether-derived observers. Ethereum is currently using a work-proof consensus algorithm similar to that of Bitcoin. He has been working for a long time on a migration to a different system, called challenge evidence, in which the amount of ether you "invest" determines your influence on the governance of the blockchain.

It's like changing the engine of your car as it rolls along the highway. Regardless of the number of tests performed and regardless of the number of parallel systems in operation, the risks are high.

Admittedly, risk is precisely what derivatives have been invented to mitigate – but derivatives creators like this risk to be reasonably quantifiable. Derivatives can help investors control risks, but they do not eliminate them. they redistribute it. Additional trade risks will need to be offset, and uncertainty of this magnitude could make ether derivatives too expensive.

Moreover, when Ethereum Hard adopts its new algorithm, there is always a risk that all minors do not switch. The current ethereum network could continue to exist and perhaps even prosper if enough participants so wish. Which token would derivative contracts follow?

Existential risk

Another risk that hangs over Ethereum is that of going back in the network. In 2016, in response to a request for an ethereum of about $ 60 million, the main Ethereum participants decided to reinstate blockchain in its pre-hack state, restoring stolen funds and creating a lasting split in the world. 'ecosystem.

That was a few years ago, when Ethereum was still young and there were many who thought that such a big pirate would slow down its growth prospects – few people expect it to happen. he is able to successfully execute something similar today. But last weekend, Ethereum creator, Vitalik Buterin, published the following poll on Twitter:

Fortunately, the majority "never go back" should reassure the market on the integrity and stability of the blockchain. But nearly 40% of voters think that the Ethereum should power, and the fact that Vitalik even asks the question is a reminder that it is possible.

Ether can be a "good" for the CFTC – but traditionally goods can not change their history or characteristics. Has the regulator ever approved derivatives based on such a malleable asset? How could you even begin to make sure that there is no asymmetry of information and that the risk is correctly integrated?

But there is an even more existential question.

Regulatory risk

The algorithm change proposed by Ethereum could lead to a larger adjustment: the ether could cease to be a commodity and become a security.

Under proof of participation, the Aether Holders can "bet" their chips in order to influence the governance of the protocol. In exchange, they earn an income.

Is it enough to make the ether a security rather than a commodity? May be.

This would not invalidate any pending ether derivatives. However, this would place them under the common jurisdiction of the CFTC and the United States Securities and Exchange Commission (SEC).

This becomes important when you compare the views of the two securities regulators with respect to cryptographic assets. The CFTC has long championed the innovation behind crypto-currencies – former President Chris Giancarlo is affectionately known as "Crypto Dad" in the blockchain sector – and recent comments from the new president mentioned above show that seems to have the same feeling.

In contrast, the SEC repeatedly blocked the issuance of ETFs based on bitcoin on the grounds that it was an immature market. If she thinks Bitcoin is not ready, it's hard to conclude that she will think differently about Ethereum.

This is likely to give pause to any regulated derived platform.

Risk of investment

Thus, given Ethereum's stage of development and prospects, as well as little evidence of unmet demand, it is unlikely that ether derivatives on a regulated market based in the United States of America materialize. There are many problems to be solved in a sector that already gives regulators and infrastructure providers more than enough to worry about.

This should not affect the phenomenal amount of work being done on the platform. However, it is likely to affect the broad institutional acceptance of the ether as an investment asset. Large investors rarely take one-way bets.

Is it important? Not necessarily – development will continue and Ethereum could still become a new operating system for the economy. Ether was not created as an investment asset.

Again, neither bitcoin. Markets have the means to retain their ideas and trivialize them, and Ethereum could one day become the darling of the alternative investment world. He is still very young, but he still has a long way to go and it will take some time before the traditional financial infrastructure allows him to integrate into the general market.

Disclosure: The author holds a small amount of bitcoin and ether.

Ethereum part and keyboard image via Shutterstock

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