In the vaults: Bitcoin Futures and storage insurance

Abstract

Blockchain technology and the trading of Bitcoin were introduced in October 2008 in the famous paper by Satoshi Nakamoto. Since then, a number of other cryptocurrencies have been created. However, Bitcoin remains the most prevalent. Financially settled Futures contracts using Bitcoin were introduced in December 2017 by the Chicago Mercantile Exchange (CME). Another large exchange, Intercontinental Exchange Inc (ICE), started trading in physically settled Bitcoin Futures through its Bakkt unit in October 2019, highlighting similarities between bitcoins and commodities, and making the concept of warehousing not only relevant but critical. This, in turn, triggered a large number of offers for storage insurance by companies like Lloyd’s, Aon, ING and other large insurers. In this article, we present some features of cryptocurrency spot and Futures markets and explain why storage devices ensure the existence of a convenience yield introduced by Working (1949) in the Theory of Storage. Then, we discuss the insurance contracts recently proposed. Finally, we infer from the spot-forward relationship the specific ‘benefit’ component priced by the market for having physical (versus financial) Bitcoins readily available.