CBOE Weakness - Unqualified Opinions

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CBOE Weakness

Earlier this week, the Chicago Board Options Exchange (CBOE) delisted Bitcoin futures. It’s not because institutional enthusiasm for Bitcoin has waned.

While institutions may still be skeptical about Bitcoin, CBOE pulled the plug because they lost, not because “grown ups are exiting the game.”

In fact, CBOE lost badly to its archrival, the Chicago Mercantile Exchange (CME), in the regulated bitcoin futures market.

(Source: Diar.co)

This is not the first time CME crushed the CBOE in trading volume. Historically, CME dominates CBOE in almost every market. The only product CBOE can (arguably) be proud of is the VIX, which is a measure of stock market volatility. The primary reason CBOE is good at that is they were the ones who pioneered the measure.

Why did CBOE lose to CME once again, after they got off to an early lead?

  1. CME was already in a winning position before the battle even begun. They had more customers connected to their trading infrastructure, and it’s relatively easy for existing customers to start trading a new instrument when it goes live. This is the same reason Google will outcompete smaller firms on a new product offering thanks to its larger distribution channel.

  2. CME has a faster trading infrastructure. Other things equal, market-makers will always trade on the faster exchange, as they receive new information faster. In trading, speed makes or breaks your success.

  3. CBOE used the Gemini auction price as the settlement price, an extremely poor decision for which they have no one to blame but themselves. Gemini’s auction has daily volume of about $1,000,000, which is extremely illiquid compared to the futures market itself. No rational exchanges would ever, ever use an illiquid index to settle futures, because those become too easy to manipulate. No one wants to trade a derivative with even a potentially manipulated underlying instrument.

Bitcoin isn’t dead. CBOE rightfully mucked a losing hand.


There’s a more general lesson here about crypto exchanges to keep in mind.

In the absence of heavy regulations, exchanges will trend towards winner-take-all - at least on any given asset, because liquidity is such a strong network effect. This is why IPO issuers pick a single exchange to list on vs. multiple. It’s also why all successful crypto exchange operators are obsessed with offering the most liquid markets to their users. (And why Binance’s discount token model was a brilliant strategic move.)

So why hasn’t Binance, as dominant as it has been, eaten the entire crypto market yet?

For starters, exchanges like Coinbase in the U.S. and bitflyer in Japan have built moats around the heavily-regulated business of fiat on-ramps and off-ramps. Binance is dominating the crypto-to-crypto world for now, but there is still a tremendous amount of crypto-to-fiat infrastructure that remains up for grabs.

For now.


PS: While we are at it, let’s debunk another popular bit of FUD, which says that the CBOE and CME futures crashed the market in 2018. No, they did not. They are not nearly liquid enough to move the market like that. Bitmex is only derivative exchange that would have been capable of ending the great bull market of 2017.

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Messari Compression Algorithm

Content and thoughts from around the web as summarized by the Messari team.

💰 [Analysis] Crypto Tokens and the Coming Age of Protocol Innovation - Continuations

Blockchain enthusiasts routinely compare decentralized protocol development to the creation and growth of early-stage Internet protocols, and that analogy is accurate not only for conceptualizing a new piece of technology but understanding the incentives at play in attracting new developers, investors, and users. But unlike Internet protocols, which were mainly researched and developed by non-profit organizations, blockchain-based networks can finance their own research and development through the monetization of native tokens circulating within their and potentially other connected networks and ecosystems. As a result, research and development can be expected to continue at a much faster pace than early Internet development. (share or read more)

💭 [Analysis] Bitcoin Development Mental Models - Adam Ficsor

Understanding Bitcoin, let alone understanding how to build on or with it, is no easy task. But Adam Ficsor shares some of the lessons he's learned and mental models he's built throughout the process of leading Wasabi development at Blockstream. Accepting the nuanced nature and sometimes misnomer labels of many features and facets of Bitcoin's protocol is important to building well. Understanding the responsibility developers shoulder, moreover, to build reliably secure products begins by understanding when things should and should not change in the given version of a protocol or piece of software. (share or read more)

Quick Bits (Don't read that, I read it for you)

Choke Points (Exchange News)

  • 🚀 Binance Launchpad continues to impress with the most recent launch of the Celer Network, a layer 2-scaling platform for off-chain payments and smart contract executions. The 597,014,925 CELR tokens sold out in under 18 minutes and raised $4 million. (share or read more)

  • 👀 Singapore based crypto exchange Huobi recently announced a new token offering platform that would allow users to purchase new token offerings through the platform. The Huobi Prime platform will be open to investors that held at least 500 Huobi Token ($HT) during the past 30 days and new token purchases will be made in Huobi Token. (share or read more)

Startup Signals (ICOs, Cryptos, and Startups)

  • 🐃 Mike Novogratz’s Galaxy Digital has seeded $5.25 million to Bison Trails, a blockchain startup that helps run infrastructure on multiple blockchains. The seeding round was led by Initialized Capital and Accomplice. (share or read more)

  • 💸 Technology firm Avnet is now accepting Bitcoin ($BTC) and Bitcoin Cash ($BCH) as means of payment. The deal inks Avnet as the third largest tech company behind Microsoft and Dell to use cryptocurrency, with Avnet already having used crypto to close mutliple multi-million dollar deals. Avnet is also planning a hardware wallet with Bitcoin.com. (share or read more)

The Powers That Be (Legal/Reg/Policy)

  • 🗻 The Japanese cabinet has approved crypto regulations that will go into effect in April 2020. The new rules limit margin trading at two to four times initial deposits, force registration of margin trading exchanges, and implements exchange monitoring similar to securities trading surveillance. The regulations were implemented for investor safety and provide a host of new tools for the Japanese Financial Services Agency. (share or read more)

  • 🇬🇧 The All-Party Parliamentary Group on Blockchain (APPG Blockchain) gave a series of presentations on the uses of commercialized blockchains to members of parliament recently with particular focus on real world applications and governmental policy. Companies IOTAEverledger, Oracle, and Loyd's of London participated with blockchain showcases such as international trade or payment settlement networks. (share or read more)

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