Bitcoin Futures Threaten to Become a Systemic Risk
Thomas Peterffy, CEO of Interactive Brokers, warns against the imponderables of poorly designed Bitcoin futures contracts and low volatilities.
Thomas Peterffy of Interactive Brokers clearly enjoy his success, yet is wary about Bitcoin futures’ effect on the securities market.
The 73-year-old Peterffy left socialist Hungary at a young age and emigrated to the USA, where he founded Interactive Brokers, a securities company, to create assets of about $18 billion.
Does Peterffy feel like missing out on the cryptocurrency boom? Not really. On the contrary, he sees substantial systemic risks on the horizon. In the long run Bitcoin could even become worthless, he says.
He’s especially concerned about Bitcoin futures. On the one hand they pose a systemic risk. On the other hand, and he doesn’t say that directly, they could be a big short to push Bitcoin lower and lower… Wall Street’s way to get rid of the troublemaker?
Read the interview, originally published in German by the Neue Zürcher Zeitung on December 4, 2017.
Bitcoin seems to be the new star in the investment world. Is that so?
Yes, certainly — albeit only temporarily.
Is this really a good investment?
In the short term, the share price should tend upwards rather than downwards. In the long run, I expect Bitcoin to become worthless.
Why?
In the end, regulation is what matters. If Bitcoin is accepted and used by a wider circle of investors, it can be difficult to collect taxes, track down illegal money or terrorist activities — and so on.
Is Bitcoin a currency, despite its volatility and no intrinsic value?
In fact, Bitcoin isn’s bound to anything. I am really worried about plans to place futures contracts on Bitcoin.
Are these plans for real, or are the operators of futures exchanges crazy?
These plans really do exist. Unfortunately, they want to process and settle these products together with other derivatives. In the so-called clearing houses, many brokers are represented with very little equity capital. If investors should speculate, because Bitcoin can reach almost any price level in a very short time, they could get into difficulties and no longer fulfil their obligations to the clearing house. I haven’t been able to stop the project yet.
Who is behind the effort?
What is certain is that the Chicago Mercantile Exchange CME, the operator of the world’s largest derivatives market, intends to start trading in Bitcoin futures in the second week of December.
What are the consequences?
The day will come when the price of the Bitcoin product moves so strongly that some investors and brokers will experience financial difficulties — which can lead to losses like in 2008 when Lehman Brothers went down. This would affect not only Interactive Brokers, but also the other clearing house members and some banks.
Do they not share your concerns?
This is a problem of the back office, for which leading bank managers are usually not particularly interested at first.
Is that a systemic risk?
Certainly. Therefore, I plead for Bitcoin products to be invoiced in a legally independent unit. In case of problems, only Bitcoin customers would have to bear the consequences. Otherwise, others would also be affected who only trade with the usual forward exchange, index or interest rate products.
Does futures trading with Bitcoin even make any sense at all? Volatility is enormous and liquidity low.
Yes, if it is separated from the rest of the trading process. Trading would probably calm down and an interesting market could develop.
Interactive Brokers customers are not yet able to trade with Bitcoin. Will that change?
Possibly. However, I would only allow the purchase and prevent bets on falling prices.

Why?
Because you just don’t know where the price is going. Theoretically, it can go up to $100,000…
How do you generally assess your business currently?
Due to the booming markets, our business is in excellent shape at the moment. Unfortunately, experience shows that this will not last forever.
Volatility is low and some valuation ratios are critical. What do you make of it?
If nothing dreadful happens, the bull market rally can continue short-term. Economic growth is comparatively solid, productivity is rising and most companies are doing quite well. In the long run, however, something always goes wrong.
Are small price fluctuations good or bad?
More critical. Some investors bet on falling volatilities, others buy them and hedge themselves with futures. They and the futures exchanges, which grant discounts for active trading, make high profits as long as prices do not move too much. But if they should break out, it will be dangerous.
In what way?
If the volatility should suddenly increase, some investors make considerable losses, which their broker will have to take over at the end of the day.
Are the brokers sensible enough?
We at Interactive Brokers are. We have begun to demand higher margins on so-called volatility products from our customers. We fear that the price fluctuations could suddenly increase one day and that volatility indices such as the VIX, VDAX or VSMI would rise rapidly and significantly.
How do customers react to this?
Some have relocated to other brokers who seem to offer them more favorable conditions. But we trust in our experience and want to avoid possible losses.
You have experienced many ups and downs. Where are we now?
Rather near a cyclical high than a market low.
You are very successful as an entrepreneur. What was key?
We must have clear objectives, always bear them in mind and concentrate on working towards them. I started as a securities dealer and wanted to be better than anyone else. My bids were always a little higher and the selling prices were slightly lower than those of my competitors. I have also always used all the technological and automation possibilities to achieve this goal.
How would you describe your management style?
I rely on people who are quick, determined and willing to perform. As I tolerate certain mistakes, I can rely on loyal employees. Basically, I’m hungry to move the business forward — and everyone who works with me on it inherits this hunger.