By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) - Futures on ether, the second largest cryptocurrency in terms of market capitalization and daily volume, will launch late Sunday on derivatives exchange CME, as investors seek to take advantage of mounting institutional interest in this evolving asset class.
Ether, which has long lived in bitcoin's shadow, is the digital currency or token that facilitates transactions on the ethereum blockchain. In the crypto world, the terms ether and ethereum have become interchangeable.
While bitcoin is the preferred store of value in the digital ecosystem, ethereum has emerged as the leading financial infrastructure, settling more than $12 billion in daily transactions, according to digital asset manager GrayScale's latest report.
The CME listing allows investors to diversify crypto holdings outside of bitcoin and provides an avenue for investors to hedge their ethereum exposure, opening a market where bearish positions on the asset can be readily expressed.
Ether futures, which follow those of bitcoin's listing in December 2017, will be cash-settled and will be priced based on a CME reference rate that draws data from major cryptocurrency exchanges Bitstamp, Coinbase, Gemini, itBit, and Kraken.
Investors don't expect huge volumes out of the gate, much like when bitcoin futures launched three years ago, but the asset should gain traction as an easy way to get access to another crypto-based network, said John Wu, president of AVA Labs, an open-source platform for creating financial applications using blockchain technology.
"This will introduce new people and organizations to crypto and to the programmable smart contract side of the ecosystem, rather than just a store of value and digital gold," Wu added.
Smart contracts are self-executing transactions.
Ethereum hit a record high of $1,764.55 on Friday, ahead of its futures launch, which helped boost the crypto sector's market cap to about $1.2 trillion, according to data tracker CoinGecko.com. It was last up 8% at $1,729.59.
(Graphic: Ethereum on the rise: https://fingfx.thomsonreuters.com/gfx/mkt/dgkvlknropb/ethereum.PNG)
Bitcoin, the largest cryptocurrency, was up 2.5% at $37,892. It hit a record high of $42,000 on Jan. 8.
Since the launch of bitcoin futures three years ago, the CME has noted significant growth in their adoption from a broad array of participants, including institutional investors.
Since the beginning of 2020, a total of 8,560 CME bitcoin futures contracts, equivalent to about 42,800 bitcoins, have traded on average per day, the CME said in a statement. Institutional interest has also increased, with the number of large open interest holders reaching a record of 110 in December.
The latest CME data also showed bitcoin's net shorts of 2,781 contracts last week were the smallest since late November.
(Graphic: Bitcoin futures vs asset price: https://fingfx.thomsonreuters.com/gfx/mkt/nmovaoexeva/Bitcoin%20futures.PNG)
JP Morgan in a research note suggested that ether futures' listing could be followed by a fall in the price of the underlying currency, much like what happened when bitcoin futures started trading. The new contracts will enable holders of physical ethereum to hedge their exposure.
Global investors have started pouring cash into ethereum funds and products, with about $56.1 million in inflows in January, according to a report on institutional flows from digital currency manager CoinShares. Bitcoin remains the recipient of the bulk of overall investor flows or 92%, equivalent to nearly $2 billion in January.
Ethereum in 2020 attracted investor flows of $926 million, while bitcoin had $4.5 billion.
(Reporting and graphics by Gertrude Chavez-Dreyfuss. Editing by Alden Bentley and Mark Potter)