Bitcoin has been on a tear, but could there be a nasty side effect?
According to Interactive Brokers founder, chairman and CEO Thomas Peterffy, the aftermath of a bitcoin crash could send the economy into a tailspin. If the new bitcoin futures market can't keep up with massive swings in bitcoin price, the broader financial system could be in peril. TheStreet spoke with Peterffy to learn more about his view, the future of bitcoin and what exactly crypto futures could mean for everyone else. This interview has been condensed and edited for clarity.
TheStreet: Where do you see the price of bitcoin going over the next year and a little further out, the next five years.
Peterffy: I have no idea. It could go anywhere, but given that there are a growing number of people who believe in it, it seems to be in the short-term that it will thrive. Because also there are no natural sellers of the item. And people who got in early have grown to love bitcoin and they don't want to sell them. I believe that there is substantially more demand than supply.
TheStreet: Could you walk us through your point of view on bitcoin futures and the impact they could have on the broader financial system?
Peterffy: My problem has to do with the fact that the clearing house mixes bitcoin with all the other products including U.S. treasuries and stock index futures, etc., and they clear them all together. Meaning that they issue or collect one payment with each clearing member each day. Bitcoin as we said before does not have an actual physical relationship to anything, so it could theoretically have any price...if it is trading at $18,000 today, it could very well trade at $80,000 tomorrow. And if that happens, many customers will be unable to pay their margin debts.
If that happens, many of the smaller brokers will go bankrupt. When that happens, the clearing house has to take over the position and buy it in, forcing further price rises. If that is a large enough force, the price could go to a level at which the clearing house becomes destabilized and they will not be able to tease apart the bitcoin obligations from some other payment and receiving obligations of other products. Therefore, they say, 'Well our safety measure is to liquidate all the bitcoin contracts if there is a crisis.'
But if you can't tease it apart from other products, you will not know at what price to liquidate it. And therefore the entire financial system could destabilize, the Fed will have to step in and that is not a good situation to be in. It would be much, much simpler to form a separate legal entity that clears bitcoin only. So we'll know, if there is some huge price change, what to do.
TheStreet: How likely is it that the giant swing in price would occur, and how likely do you think it is that the solution you propose actually comes to fruition to give us separate bitcoin entities?
Peterffy: There is certainly some likelihood of that happening. It's a rather small likelihood, but the impact would be huge. It's an incredibly expensive eventuality or possibility. I think that eventually people will see what I'm speaking about because I will not stop speaking about this. It's really, really scary.
I think that I'm at least 50% certain that they will eventually put this product into a different clearing entity.
TheStreet: People say there is no intrinsic value in bitcoin, no inherent value in this currency. Do you agree with that?
Peterffy: I agree with it, but I would add that also there is no inherent value that approaches the price of gold, for example. And there is no inherent value in paper currency either. It's just a matter of belief.
TheStreet: Is there anything we could compare the bitcoin market or the bitcoin craze to?
Peterffy: No. That's the problem. That's why it's so difficult to value. There is nothing I could relate it to.
TheStreet: Do you foresee any other cryptocurrencies eventually having a futures market of their own or is this just limited to bitcoin?
Peterffy: That depends on the popularity of bitcoin. 21 million coins, which the issue is limited to, is certainly not enough. And if it becomes even more popular it will become extremely expensive. There will be a need for issue of smaller coins. If it doesn't really succeed, then the smaller coins will have an even less likelihood of succeeding.
TheStreet: What's your take on the insane rally in litecoin?
Peterffy: It has to do with easier handling, mostly. People are trying to seek other investments that are related to bitcoin that in their mind have more potential to rise than bitcoin because bitcoin is already so high up.
TheStreet: What about government regulation? Is that an if or is that a when?
Peterffy: I don't really know. The whole idea of cryptocurrencies is that there is no regulation needed. If the government wants to get into this, I don't really know how they would do it. It would become a cat and mouse game...I think if government regulation comes, it's more likely that it will shut the currency down than it would turn it into a more formal set of rules.
TheStreet: Do you think we'll see a future when transacting with cryptocurrency is the norm?
Peterffy: It's conceivable. I think it's conceivable, but I don't think it's very likely in my lifetime.
TheStreet: What do you think the issue is? Are people just not comfortable using crypto or is it too hard?
Peterffy: Those technological problems will be solved. That is not the issue. I think we're living in an economic system that would be completely turned upside down if cryptocurrencies were everyday accepted payment methods.
TheStreet: What should investors at home be watching out for that could signal an end to the bitcoin craze
Peterffy: The moment the government steps in. There will be more and more scandals, and if the government steps in, that is the point at which people would have to bail. But like I say, it is conceivable that bitcoin will prevail.
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