In this post I will explain why I think that Bitcoin Futures Trading will bring a huge Bear Market.
The biggest news in derivatives world is the impending launch of Bitcoin futures, first by CBOE, then shortly thereafter by CME.
What are “Futures”?
Futures are financial contracts obligating the buyer to purchase an asset or the seller to sell an asset, such as a physical commodity or a financial instrument, at a predetermined future date and price
Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange.
Some futures contracts may call for physical delivery of the asset, while others are settled in cash
Definition from Investopedia
Why does the market need Bitcoin Futures?
- Historically, the interest of futures is to own physical assets that would be hard to buy easily.
- It is also used to make these assets (gold, steel, corn…) more liquid and easy to trade between corporates that need it and investors
- Bitcoin DOES exhibit some of these symptoms, it is not easy to have and to buy for most people (even if for us it does seem easy)
- Big spot markets (what we have right now) paved the way for success of futures markets
Why Futures are a threat to Bitcoin and Cryptos?
I am a Crypto HODLer but we have to admit that it is very difficult to justify the stratospheric price and why it rocketed in 2017.
Don’t forget that cryptocurrencies erode the demand for fiat currencies (therefore fiat currencies depreciate vs cryptocurrencies). This is not a good news for Central Banks and Governments:
They will:
- Find some way to restrict their use
- Introduce their own crypto-fiat
- Partner with the Banking system to artificially make Bitcoin go back to >$5000 to scare crypto-investors and general public
Shorting (betting on the fall in price of an asset) is difficult with Bitcoin because people are overly optimistic and it is costly via Exchanges.
In the Financial Academic Literature:
”Costly shorting can allow an asset's price to remain excessively high for an extended period.”
This could be one thing that supports Bitcoin's current price.
Futures will make it easier to short Bitcoin:
"The futures reduce the frictions of going short more than they do of going long, so it's probably net bearish," said Craig Pirrong, a business professor at the University of Houston. "Having this instrument that makes it easier to short might keep the bitcoin price a little closer to reality."
My friends, I hope that I am wrong but I think this is what will happen.
Different signs show that we are at the end of the "bubble":
- Huge gains during the last week (before a bubble burst it rallyes even more strongly)
- Mass market is definitely invested in Bitcoin (my parents know about it, a taxi asked me to buy some, I played pokers with strangers talking about crypto investments...)
- It has become the target of the government that are just waiting to burst it open
Please remember this is my personal opinion and not a financial/investment advice. You need to do your own research to make your own decision. Investing in cryptocurrencies can lead to financial losses.