Six weeks can be a long time in the world of bitcoin.
Last month, JPMorgan Chase & Co. chief executive officer Jamie Dimon staked out a position for himself as one of the financial market’s most prominent bitcoin sceptics, saying he’d fire any trader who dealt in it. “I could care less what bitcoin trades for, how it trades, why it trades, who trades it,” he told a conference in Washington. “If you’re stupid enough to buy it, you’ll pay the price for it one day.”
How times change. No less an institution than, um, JPMorgan is gauging client demand and the potential risks of facilitating client trades in CME Group Inc.’s planned bitcoin futures contracts, a person with knowledge of the situation told Hugh Son of Bloomberg News Tuesday.
There are obviously a couple of distinctions you might want to draw here. Bitcoin futures aren’t the same thing as bitcoin, and facilitating trades isn’t the same thing as trading. Even so, it’s hard to see how a Wall Street bank could become an intermediary in this without putting its own capital on the table.
It’s not clear at this stage how exactly JPMorgan would get involved, but the most obvious way would be using its futures commission merchant, or FCM. Such entities are the gatekeepers to futures clearing organizations and represent the capital-intensive central plumbing of the US derivatives market. That’s by far the best fit for JPMorgan’s talents—its FCM, JPMorgan Securities LLC, is North America’s second biggest by customer assets, according to Commodity Futures Trading Commission data.
In some ways, that’s a business relatively insulated from the risks inherent in the products changing hands. FCMs make their money from commissions on trading and interest on their customers’ funds, and by their nature are well-diversified across the field of physical commodities, currencies and other futures and options. There should be no real pricing risk, because FCMs don’t trade on their own account. But swings in derivatives prices can nonetheless impose credit and liquidity risks, not least because customers are mainly trading on margin. Little wonder, then, that JPMorgan seems to be treading with care.
For all Dimon’s scorn, this move was in many ways inevitable. Banking is a client-service business, and if clients want to trade cryptocurrencies, bankers are going to start exploring ways to help them. JPMorgan’s asset-management arm was for many years a bastion of active investment strategies, resisting the rise of indexing and exchange-traded funds even as the likes of Vanguard Group Inc. and BlackRock Inc. won fresh inflows. Unable to beat the passive funds, JPMorgan joined them three years ago by launching its first ETF. It’s now offering 18 such products in the US alone.
This Gadfly thinks it’s unlikely that digital currencies will ever challenge the position of fiat money. As mediums of exchange they’re clearly inferior to traditional money except for people involved in questionable activities, and consequently they represent no risk to the US dollar’s status as the premier unit of account. As stores of value, the third traditional characteristic of money, bitcoin has done pretty well, reaching $8,245 on Monday—but the odds that an individual cryptocurrency “goes to zero” are, if anything, little different than those an individual stock goes bankrupt.
Still, digital currencies don’t need to be “money” for them to be a worthwhile business for a brokerage like JPMorgan. Right now, the value invested in all cryptocurrencies is about $242 billion, according to data provider coinmarketcap.com.
That’s a potent indicator of demand—and where demand leads, banks tend to follow.