Chicago Mercantile Exchange launches Bitcoin price index, Bitcoin is one step closer to gaining mainstream credibility

The world's largest futures exchange operator, CME Group, has officially launched a Bitcoin price index to track the price of Bitcoin, bringing Bitcoin one step closer to gaining mainstream credibility.

CME Group’s gauges can be used as building blocks for futures contracts, making it easier for professional and individual investors to trade bitcoin.

The new CME index is "clearly a precursor to some type of futures contract," said Daniel Masters, chief investment officer at Global Advisors (Jersey) Ltd., which manages $25 million in bitcoin assets.

Trading Bitcoin can be logistically tricky. That’s because U.S. brokerages generally don’t offer a way to trade Bitcoin. People who want to buy and sell Bitcoin need to create an account directly on a Bitcoin exchange to trade. There are dozens of such exchanges around the world, many of which are small and lightly regulated. But if a large institution like CME launches an exchange-traded fund or futures tied to Bitcoin, investing in the digital currency will become similar to trading stocks or commodities.

By entering the bitcoin space, CME is establishing a connection with a virtual currency that has faced skepticism in the past. Bitcoin has previously been linked to criminal groups such as Silk Road. Bitcoin prices are also known to be highly volatile. According to Coindesk, the price of a bitcoin has risen from $552.82 in August this year to $700 today.

Mark T. Williams, a Boston University lecturer and critic of digital currencies, said CME is risking its reputation by partnering with murky overseas bitcoin exchanges.

Williams said:

“The price of Bitcoin is still in an unpredictable stage, and relevant regulations will affect the daily price of Bitcoin.”

The reputation of bitcoin exchanges has been tarnished by regulatory scrutiny and a series of notorious cyberattacks, including the August attack on Hong Kong-based digital currency exchange Bitfinex, which saw more than $60 million worth of bitcoin stolen.

CME said its new index is based on data from six bitcoin exchanges, including the international arm of China’s OKCoin exchange, whose mainland China platform is the world’s most active digital currency trading market, according to bitcoinity.org.

A CME spokesperson said:

“The product we are launching will bring more transparency to the bitcoin market. We have a long history of developing new markets across a variety of asset classes.”

The spokesperson also said that the bitcoin exchanges that contribute data to the CME index "are all deeply vetted."

CME declined to comment on whether it plans to launch bitcoin futures. To launch bitcoin futures, CME would first need to obtain approval from the U.S. Commodity Futures Trading Commission.

The new CME index reveals a brewing war among exchanges as Bats Global Markets seeks regulatory approval to list an exchange-traded fund (ETF) tied to the price of bitcoin developed by brothers Cameron and Tyler Winklevoss.

The SEC is expected to decide whether to approve the ETF early next year. Currently, U.S. investors already have an ETF-type product, the Bitcoin Investment Trust (BIT), but BIT is traded in the less regulated OTC market and its ability to track Bitcoin prices is not satisfactory.

The New York Stock Exchange began publishing a daily Bitcoin price index in U.S. dollars last year. CME seeks to follow the NYSE by introducing a daily price index and a real-time updated price index, saying they have the best method to calculate the Bitcoin benchmark. The real-time index went live last Sunday, while the daily price index will go live on Monday.

The Chicago exchange giant said it designed the new index to meet international standards for financial benchmark regulation. CME said an independent regulatory committee would help ensure the indexes are not used for gambling by unscrupulous traders.

Sandra Ro, CME’s Executive and Digital Lead, said:

“It’s very important that price insensitivity is a core principle.”