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A trader signals an offer in the Standard & Poor's 500 stock index options pit at the Chicago Board Options Exchange (CBOE) on November 2, 2011 in Chicago, Illinois.
- Ed Tilly, CEO at Cboe Global Markets, said that for bitcoin futures to truly grow, an exchange-traded note needs to be launched.
- Without an index for retail customers to trade off, Wall St traders - who would use the futures contracts to hedge - won't have a significant reason to enter the market.
- Tilly said the Securities and Exchange Commission has been hesistant to approve an exchange-traded note in the crypto space previously because it cannot guarantee manipulation will not occur on markets it does not oversee.
What will it take to get Wall Street firms to finally dive headfirst into bitcoin?
Talk to anyone involved in the cryptocurrency market for even a brief amount of time and it's likely the topic come up.
And just like everyone else in the space, Ed Tilly has his own theory on what's holding back the biggest investors from getting involved in the largest cryptocurrency.
The CEO of the largest US options exchange said the growth of bitcoin in listed markets is still hamstrung by the lack of a trading product geared toward mom-and-pop investors.
Ed Tilly, CEO, president and chairman at Chicago-based Cboe Global Markets, said trading activity in bitcoin futures hasn't seen substantial growth because the cryptocurrency lacks a tracker or note tied to the price of the currency that retail customers could trade. The two products - futures and exchange-traded notes - are critical to each other as they offer access points into the market for both Main Street and Wall Street.
Exchange-traded notes (ETNs), unlike futures, are more accessible to the average investor due to their low barrier for entry, he said. Setting up an account to trade futures requires a significant amount of legwork.
"The power of having that future there is also having an ETN that is more attractive to retail, and then institutions can lay that risk off on the listed futures market," said Tilly at a media luncheon on Wednesday. "Absent that leg and introducing trackers or notes, I think we will be in this, 'It trades every day, but it is not the story.'"
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Cboe launched the first bitcoin future in December 2017, followed shortly thereafter by crosstown rival CME Group. The issuance of cryptocurrency products on two established exchanges led some to speculate on an influx of institutional money moving into the markets.
But Bitcoin futures have failed to grow substantially. On Thursday, the Cboe Futures Exchange had 3,420 contracts in open interest. Exactly one year ago, open interest was at 5,306 contracts. By comparison, Cboe Volatility Index (VIX) futures, the exchange's most popular futures contract, had open interest of 370,354 contracts on Thursday.
Tilly credited the success of Cboe's VIX future to the number of financial products related to the contract both Wall Street funds and individual people can trade.
"Why is VIX successful? Really calls upon the pool of liquidity in the S&P 500. Oh, and there is an institutional futures contract that is traded at the CME. There is a most successful ETF, SPDR," Tilly said. "There are trackers and replicating notes that lever up that exposure. All of that works together."
That's not to say the cryptomarket hasn't tried offering additional listed products geared toward mom-and-pop investors. Regulators, however, haven't been keen to give the greenlight on an exchange-traded product tied to a bitcoin exchange. In August, nine bitcoin ETF applications were rejected by the Securities and Exchange Commission.
The issue, cited by the SEC in its rejection and reiterated by Tilly on Wednesday, is around concerns over approving something tied to a market out of the regulator's jurisdiction. Reggie Browne, considered the 'godfather' of the ETF market, said bitcoin ETFs will be approved "no time soon," while speaking at a conference in November.
Tilly said regulators are left with a difficult question when considering approval of the issue.
"How do I protect the US customer from manipulation in a market that I don't regulate?" Tilly said. "You answer that question, you get your first ETN."
And with the government shutdown continuing, Tilly doesn't see a way to move the crypto industry forward, and launch new products like ether futures, until discussions can resume with the SEC and Commodity Futures Trading Commission.
"I have two regulators that are not taking calls right now," Tilly said. "That doesn't mean there is nothing we are interested in. It means nothing is going to happen in this government shutdown."
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