I lately wrote an article about why the Bitcoin price may drop once future trading. You can read up on that here.
Now that it's happening, we have a little bit of a clearer picture and it's about time to discuss what is more likely to happen. Of course, this is just my view on things and it's probably not educated enough, but I'm trying to write these things down to start a discussion.
In my previous article, I argued that hedge funds and other players may be buying Bitcoin upfront to be able to effectively dump the Bitcoin price after building up large short positions to make a short-term profit.
However, here's why I think the bulls are going to win that race in a longer run:
Pumping is cheaper than dumping
What can people holding long positions in futures do to move the Bitcoin price in their favor? Sure, buy Bitcoin on the crypto exchanges to increase demand.
What can people holding short positions in futures do to move the price in their favor? As it happens, it's selling Bitcoin at a low price.
Of course the shorters need to first get the Bitcoin to sell in order to dump the price. They have two basic possibilities:
- Buy them upfront
- Borrow them
Number 1 may be one of the reasons why the Bitcoin price has been soaring before the derivatives trading has even started. However, available supply on actual Bitcoin is pretty limited and the price is extremely sensitive to such demands. On the other hand, a significant increase in price would be exactly in the favor of shorters to have more short-term downward potential.
With number 2, you may argue that it's much cheaper to borrow coins than buying them. This is true, but again, the supply is very limited (even more limited than on the trading markets) and it's actual Bitcoin that needs to be supplied. In addition, borrowing Bitcoin will mean that people open up even more short positions. After all, when borrowing an asset to sell, you speculate on decreasing prices to buy back cheaper.
Because of the very limited supply of Bitcoin, I suppose that the long positions are more likely to win. Here's an example:
Let's imagine shorters are able to build up 1,000,000 Bitcoin units to be able to dump the price to $8,000. That means that potential bulls need to buy these units plus more to pump the price again (making $8bn), say another 1,000,000 Bitcoin at an average price of $15,000 to bring the price back up to $17,000. This comes at a cost of "only" $15bn, totalling up to $23bn. However, they would own 2,000,000 Bitcoin afterwards that have a value, so the money is not lost, just bound. In addition, compared to their long positions, those $23bn may be rather marginal.
Keep in mind that this is an example and the numbers are probably much lower.
Happy to discuss what you think about my theories in the comments :-)