The largest options exchange in the US is moving in on a $1.6 billion bitcoin opportunity (CBOE)

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Bitcoin presents a $1.6 billion revenue opportunity for exchanges, according to a wide-ranging report on cryptocurrencies by Bank of America Merrill Lynch.
Cboe, a first mover in cryptocurrencies among exchanges, appears the best positioned to capitalize on the opportunity, according to the bank.
Cboe has partnered with Gemini, a digital currency exchange, to roll out bitcoin-linked products as early as this year.

Bitcoin represents a $1.6 billion revenue opportunity for Wall Street's exchanges.

That's according to a wide-ranging report on cryptocurrencies by Bank of America Merrill Lynch, which said exchanges could benefit from a "significant revenue stream" from bitcoin. And one exchange group has moved to the front of the queue to take advantage of this potential opportunity.

Cboe, the Chicago-based exchange operator that's home to the largest options exchange in the US, recently partnered with Gemini, a digital assets exchange started by Tyler and Cameron Winklevoss, to roll out bitcoin futures by this year or early next. Futures are contracts that allow two parties to exchange an asset at a specified price at an agreed upon date in the future. It is also looking to list a bitcoin exchange-traded fund.

That followed an earlier attempt by Bats Global Markets, which was acquired by Cboe earlier this year, to list a bitcoin exchange-traded fund from the Winklevoss twins. That attempt was rejected by regulators, with the Securities and Exchange Commission citing the lack of "surveillance-sharing agreements with significant markets for trading the underlying commodity or derivatives on that commodity."

The Cboe deal with Gemini might help address that.

"The ETF and futures contracts do not depend on each other, but clearly, they would be reinforcing," Bank of America said. "If these efforts to apply existing exchange technology to [bitcoin] work, then this creates a new revenue pool for the exchange industry."

Cboe's chairman and CEO, Edward Tilly, has taken a position on bitcoin that is contrary to that of his peers in the space. At a recent conference he said, "like it or not, people want exposure to bitcoin."

Meanwhile, rivals have shied away from cryptocurrencies. For instance, Adena Friedman, the CEO of Nasdaq, referred to initial coin offerings, a red-hot cryptocurrency-based fundraising method, as "bleeding edge" and CME president Bryan Durkin told Bloomberg his firm wasn't looking at bitcoin futures.

That's despite bitcoin soaring more than 400% this year. The market for cryptocurrencies has exploded from $17 billion to $170 billion since January. Volumes per day for bitcoin are up from $57 million at the beginning of the year to $628 million, according to Blockchain.info.

Cboe is positioning itself to capitalize on this explosive growth. Here's John Deters, chief strategy officer of Cboe:

"It has now evolved to a point that its utility as both a payment vehicle and a store of value is clear, while the overall popularity of digital assets has proven to be pretty resilient."

Deters told Business Insider that the exchange is exploring a broader family of cryptocurrency products in addition to the bitcoin futures product.

$1.6 billion opportunity

The $1.6 billion bitcoin revenue figure is a bull case scenario, according to Bank of America, and is based on the assumption that cryptocurrency volumes end up at about 10% of current fiat currency trading volumes.

Here's the bank:

"The FX market is highly liquid. For example, spot FX volumes were $1.65tr as of the most recent BIT Triennial survey in April 2016. If these volumes were to materialize, with the same relationship between spot market and futures, and the same revenue per contract, the revenue pool would be about $1.6bn."

The estimate also assumes "there is no substitution of coin volumes for other contracts."

Just because Cboe is best positioned to take advantage of this opportunity, Bank of America doesn't think it will be the only firm to benefit from it. The bank expects other exchanges and market structure companies to jump on the bitcoin bandwagon if Cboe's futures or ETF products are successful.

"We would assume that other major derivative players like DB1’s Eurex and the CME would try to become involved," the bank said.

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