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Moody’s, Fitch, S&P: Bitcoin Futures Considered Risky

The top three credit rating agencies, S&P, Moody’s and Fitch, said they consider Bitcoins future exchanges to be risky business, and that banks which clear Bitcoin futures contracts could have their credit rating downgraded if Bitcoin futures trading volume continues to grow.

The credit rating agencies assign letter grades to banks, corporations, and governments to indicate how likely they are to default on debts. The lower a grade a bank has, the harder and more expensive it is for them to obtain loans, limiting the amount of credit they can extend to clients.

Moody’s says Bitcoin futures contract clearing is considered credit negative since it exposes the bank to the volatile Bitcoin market, whether they are directly handling cryptocurrency or not. Volume is not enough to cause a credit rating decrease at this time, but if volume increases enough that will cause an increase of risk that will force agencies to assign a lower grade.

A Bitcoin futures contract is an agreement to buy or sell Bitcoin at a pre-determined price at a specific time in the future. This can be used by traders to manage their risk, since if the market drops they could sell their Bitcoins at a higher fixed rate that was agreed on in the futures contract regardless of how far the market drops.

This mechanism that can help manage risk can be used to profit from shorting the Bitcoin market too. The Bitcoin market has been in a sharp decline since futures contracts launched, making shorting quite profitable, to the point that a federal investigation has been opened up by the Commodities Futures Trading Commission to determine if futures trading has led to manipulation of the Bitcoin market. The initiation of the federal investigation and this announcement from the credit rating agencies regarding Bitcoin futures might be related.

Bitcoin futures contracts were officially launched in December 2017 and are now traded on the Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange (CBOE).  Trading volume of Bitcoin futures contracts has been increasing, with a record USD 670 million of daily volume on 25 April 2018. Futures are primarily traded by institutional investors, so increasing futures volume is a positive sign that institutional investors are putting more money into Bitcoin.

Bitcoin futures contracts are cleared by Options Clearing Corporation for CBOE and Clearport for CME, so this statement from the credit rating agencies is directed at these institutions, but also applies to any institutions that decide to facilitate clearing of Bitcoin futures contracts in the future.

 

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