Ever-volatile bitcoin is embraced by Wall Street

Bitcoin's stratospheric rise this week follows the digital currency's embrace by mainstream trading platforms and is seen by some in finance as normal growing pains often experienced by innovative technologies.

After starting the year at around $1,000, bitcoin, which first appeared in 2008, on Wednesday surged as high as $11,434 before promptly falling 15 percent. Near 1900 GMT Thursday, the virtual currency stood at $9,839.

Nasdaq is the latest major financial market to reportedly plan to launch a bitcoin futures exchange next year, although the exact timing is unclear. The Chicago Mercantile Exchange and the Chicago Board Options Exchange announced plans to offer bitcoin trading in the next few months.

Brokerage firm Cantor Fitzgerald also is looking to begin trading bitcoin derivatives on an exchange it owns.

"The asset class is not going away," Cantor Fitzgerald chief executive Shawn Matthews told The Wall Street Journal.

The exchanges will trade bitcoin derivatives, not the currency itself, including futures, which set prices for a commodity or financial instrument at a future date.

"The listing of bitcoin products by derivative markets is a major indirect endorsement that this thing is here to stay," said David Yermack, a finance professor at New York University, adding that the markets will attract new investors who bet that bitcoin will fall in value.

Yermack, who teaches a course on bitcoin and cryptocurrencies, is closely watching the development of blockchain, the underlying technology behind bitcoin.

Bitcoin has been propelled by the rising prominence of blockchain, which leading banks increasingly view as being at the heart of financial technology, Yermack said.

Still, "it is hard to come up with an explanation for why (bitcoin) has been driven by a factor of 10 since the start of the year," Yermack told AFP.

"It is just mind blowing."

Fed Vice Chairman for Supervision Randal Quarles warned Thursday that digital currencies could pose a threat to financial stability because it is unclear how they would perform in a crisis.

"The 'currency' or asset at the center of some of these systems is not backed by other secure assets, has no intrinsic value, is not the liability of a regulated banking institution, and in leading cases, is not the liability of any institution at all," he said in prepared remarks.

"While these digital currencies may not pose major concerns at their current levels of use, more serious financial stability issues may result if they achieve wide-scale usage," said Quarles.

- Bigger than gold? -

The embrace of bitcoin by mainstream exchanges has aided the digital currency's image after it was once associated with drug dealing and money laundering. It also was viewed as risky because it is not regulated or backed by a central bank.

"The biggest problem the banks have faced has been the regulatory uncertainty," said Lou Kerner, a self-described crypto "evangelist."

The announcements by the CME and other mainstream exchanges ease worries about that problem, he said.

Kerner, who believes bitcoin eventually will become more valuable than gold, batted away talk that the cryptocurrency is overvalued.

"You can find a lot of people to tell you it's a bubble, and that is what they said at $100, at $1,000, at $10,000, but that does not really add anything to the dialogue," he said.

Jeff Currie, head of commodities research at Goldman Sachs, also views bitcoin as comparable to gold, likening its creation through sophisticated computer technology to metals mining.

"Bitcoin is a commodity, not much different than gold," he said Wednesday on Bloomberg Television. "I don't see why there is all this hostility to it, because it fits the same as many other commodities."

But a key problem facing bitcoin is its limited liquidity, he said, with total market value globally of around $164 billion compared with the $8.3 trillion gold market.

"If you give bitcoin decades to grow and it becomes as big as gold, which I am not trying to forecast ... then the volatility would come down," he said.