Finance

Bitcoin Futures…

... and the future of Bitcoin

Following CME Group's Bitcoin futures trading launch, just a week after its counterpart CBOE, the markets are reacting.

The display of a bitcoin ATM is seen in Zurich, Switzerland December 19, 2017. REUTERS/Arnd Wiegmann

It’s been, as it always is, a wild couple of weeks for the world of cryptocurrencies, but not for the same usual reasons.

Yes, there were crazy price swings, Litecoin quadrupled in price over a couple of days, Ethereum was up 70% in under 24 hours, and Bitcoin, the world’s most famous cryptocurrency, broke record-high after record-high settling, if that is possible, between USD18,000 and USD19,800, depending on which minute you were looking.

But the novelty of the last few weeks was the launch of Bitcoin Futures trading on a couple of North American stock exchanges.

Put simply, stock futures are financial instruments that allow traders to bet on the future price of a stock. They are common in any stock exchange and they tend to allow the market some price stability as they act as a barometer of market sentiment.

Beyond that, they are highly regulated, which contrasts dramatically with the current state of cryptocurrency market that operates beyond the control of any state institution.

On the evening of Sunday 10 December, the Chicago-based CBOE launched the trade for the first time and the reactions were clear. two trade-freezes were necessary to calm the constant price hikes.

The day wrapped up with a 26% price increase. The only thing more volatile than bitcoin that day was, you guessed it, Bitcoin Futures.

The Chicago Mercantile Exchange (CME) Group offered a similar instrument, followed by TD Ameritrade, the largest online brokerage futures operator. In January, Nasdaq, the world’s second stock exchange, will launch its own version of Bitcoin Futures.

Beyond this frenetic market activity, the launch of these financial instruments has a deeper meaning for the crypto world as Bitcoin becomes ever more recognized as a de facto value holder by traditional financial institutions.

As always, it is uncertain how much the Futures hype affected the retail price of Bitcoin but it is likely that a lot was pumped into the coin to play on the expectation of capital inflows from big Wall Street investors.

If that was the case, then a lot of people will be disappointed. It seems major stock exchange investors are much more cautious than the average John Doe.

Yes, the price rise on Monday was impressive and Bitcoin Futures were trading thousands of dollars above the coin’s retail price. However, at a trade volume of USD41 million, it represented a speck in the horizon of Bitcoin’s over USD2 billion daily retail trade.

It is likely that last week’s investors were at the fringes of the market and were more willing to take a bigger risk in being the first to try out the new mechanism. Traditional investors are holding off to find out the result of the first futures contracts, which will expire on January 17. Then, if things go well, they will start allocating cash for the investment.

That is where the crypto-community fears stock exchange markets can start to take control of the cryptocurrency world by putting up major positions in a market dominated by small investors. The futures options will be capped, but within the crypto world, a contract maximum of BTC5,000 investment, as set by the CME, represents over USD80 million in investment. This sort of major investment position could severely affect an already extremely volatile market.

For now, the futures market will not affect the average Bitcoin investor, but as financial institutions circle to take their share of the market, things might change.

If Bitcoin wants to retain its raison d’íªtre as the poster boy of the decentralization of money and the empowerment of the individual, Wall Street will be only the first of many battles, and one you don’t want to miss out on.

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