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Bitcoin is a hot mess, and the new futures contracts could be D.O.A.

Bitcoin prices are booming, but the market is a hot mess right now. The cryptocurrency soared as high as $19,230 Thursday, according to one exchange (Coinbase). Or was the high $16,672, as Yahoo Finance’s official bitcoin price index says it was?

(It’s worth noting that Yahoo Finance’s index is a weighted average with prices drawn from about 60 exchanges, whereas Coinbase’s price reflects execution prices from only its platform.)

The fact is, the cryptocurrency is straining under the weight of a sluggish, outdated infrastructure — just as it’s about to go mainstream. Bitcoin futures are set to launch this Sunday evening on the Cboe Futures Exchange. But after yesterday’s chaos, those futures contracts might be dead on arrival.

Casino gambling chips decorated with bitcoin logos sit on display at the CrytoSpace conference in Moscow, Russia, on Friday, Dec. 8, 2017. CryptoSpace is Eastern Europe’s largest conference dedicated to blockchain technology and cryptocurrencies and runs Dec. 8-9. Photographer: Andrey Rudakov/Bloomberg

The biggest problem facing bitcoin is that the network is slow. That might not be what you’ve heard, as the underlying technology, blockchain, is being used in part to speed up transaction times in a wide variety of industries.

Bitcoin transaction times can take hours on a good day, and transactions fees have climbed as high as $10. That’s because bitcoin was created way back in 2009 and was designed to allow only 1 MB of transaction data (1 block) to be processed about every 10 minutes. Everyone competes to have their transaction processed as quickly as possible, which bids up the transaction fee. There are ways to speed up the network, but those efforts have run into complications.

On top of that, the individual exchanges have been experiencing outages as they scramble to keep up with customer demands. (Coinbase rose to the top of Apple’s US app store Thursday — despite persistent outages that prevented customers from buying or selling bitcoin).

Some say the problem* is that there are hundreds of bitcoin exchanges without a central clearing or pricing authority. But having different prices on exchanges — whether it’s bitcoin, stocks, bonds or commodities — isn’t necessarily a problem. Speculators can arbitrage the different prices, buying on one and selling on another, pocketing the difference. In theory, this “arbing” brings the prices in line with each other. But in practice, this has been difficult to do with bitcoin because of the slow transaction times and the fact that exchange sites are frequently crashing or simply operating slowly due to high volume.

Big banks and brokers fear bitcoin volatility

Enter JPMorgan, Goldman Sachs, Bank of America Merrill Lynch, Morgan Stanley, Citigroup and just about all the other big (and small) brokers on Earth. They’re represented by the Futures Industry Association (FIA), which Thursday published an open letter to the CFTC, the US futures watchdog, attacking the new bitcoin futures set to launch on the Cboe Futures Exchange and the CME Group. The big brokers care so much because, as clearing members of the exchanges, they’re the ones ultimately on the hook for losses if customers lose money and can’t pay.

The FIA didn’t pull any punches, saying, “We remain apprehensive with the lack of transparency and regulation of the underlying reference products on which these futures contracts are based and whether exchanges have the proper oversight to ensure the reference products are not susceptible to manipulation, fraud, and operational risk.”

The FIA is also criticizing the way the futures exchanges are bringing these bitcoin products to market. They relied on a one-day “self-certification” procedure that basically allows the exchanges to check off a few boxes and tell the regulators, “don’t worry, we’ve done our homework.”

That’s not good enough for the FIA, which says, “Unfortunately, the launching of these innovative products through the 1-day self-certification process did not allow for proper public transparency and input.”

JPMorgan and co. couldn’t have picked a better day to publish this letter, as the cracks in bitcoin infrastructure have never been more publicly visible. According to Fox Business, some big brokers are refusing to let their clients trade the new bitcoin futures until the kinks have been worked out. Others are planning to limit trading access to select clients. These brokers are operating perfectly within their rights. They’re the ones on the hook.

If the CFTC does temporarily put the kibosh on bitcoin futures, that announcement would likely be made today. But even if it does’t, come Sunday evening at 6:00 p.m. EST, when the Cboe Bitcoin Futures are set to launch, there might not be anyone trading with size.


* There’s also a separate price manipulation issue at play. Asian bitcoin exchanges tend to be less liquid than those in the West, and they can cause wild price swings during overnight trading hours in the West. Similar observations have been made about the gold market for years.