Two of the largest futures and option exchanges in the world, CME and CBOE, recently announced that, starting later this month, it will be possible to trade Bitcoin futures.1 Nasdaq was quick to leak its plans for offering Bitcoin futures, too, starting »next year«.2
For us, speculators and HODLers alike, this raises the question: What does this mean for Bitcoin – »the asset«?
First off: This is a Big Deal
The announcement of Bitcoin futures is of enormous importance to Bitcoin specifically and also for crypto currencies in general. Why?
Because this will be the first time that regular institutional investors (pension funds, ETFs etc.) can — and will — participate in the Bitcoin price discovery. And
because it is the first time that crypto currencies are being accepted as a new asset class by financial institutions in the heart of our current financial system.
What Does it Mean for the Price of Bitcoin?
There is much speculation about what the introduction of Bitcoin Futures by CME and Nasdaq mean for the price of Bitcoin. Logic says, there are only three ways this can go:
Option 1: Absolutely Nothing Happens
If there is any merit to the efficient-market hypothesis,3 the introduction of Bitcoin futures should mean absolutely nothing. This is because, according to this hypothesis, the current market price on the crypto exchanges should already reflect all the relevant information publicly available in order to come to a »fair« price of Bitcoin.
So, theoretically, all good or bad news from this announcement should already be priced-in.
Fortunately, this hypothesis is plainly wrong — at least in its practical application. As anybody pitching Bitcoin to a friend or relative may know, hardly anybody has all the necessary information at his disposal in order to decide upon whether to buy Bitcoin or not.
Further, at this point in time, most — if not all — institutional investors simply cannot buy crypto currencies for compliance reasons — even if they wanted to!
So, making Bitcoin accessible to institutional investors by introducing the futures is likely going to have an effect on its price. Further, CME/CBOE effectively declaring that »Bitcoin is a new asset class« should be without any effect on its market price? Come on!
Option 2: The Tail Wagging the Dog
Trader legend Peter Brandt recently said:
#Cryptomaniacs -- ready or not, here comes the tail that will wag the dog. So, ready or not, welcome to my world (futures markets). $BTC pic.twitter.com/JkWztOG1i0
– Peter Brandt (@PeterLBrandt) 26. November 2017
With this, he is mostly referring to the gold market, where many people argue that the price of gold on the futures markets (»paper gold«) is not the »real« price for gold but somewhat or even far below that. They argue that if gold could only be traded physically (bars or coins), real demand for the asset would show and the price would be much higher.
This might very well be true, since physical gold is illiquid and final in amount, and »paper gold« (a.k.a. futures) is liquid and unlimited in amount. Of course, adherents to the efficient market hypothesis would argue that people are pricing in a »(il)liquidity premium« when selling gold futures. Yet again, some doubt may be in order whether this premium is priced adequately.
With BTC futures, so the thinking goes, people can be long and short the limited asset Bitcoin in unlimited quantities. And:
Futures contracts don't have to settle in bitcoins, which means it can be shorted with no limit. So does that turn bitcoin into gold? Then bitcoin just gets smashed? Or cash market & futures market don't price the same and thus revealing the lie.
– JoelHeyman (@JoelHeyman) 3. Dezember 2017
No. Because:
People will short of course and they will get squeezed by price action rather than by delivery.
– Alex Gurevich () 3. Dezember 2017
Why? Because
Bitcoin is both limited in amount, like gold, but also extensible, like fiat currency. – @TraceMayer
Bitcoin has infinite liquidity because it’s infinitely extensible. This liquidity, however, will have its price.
This time it is the dog wagging its tail. Which leaves me with
Option 3: 🚀
— What do you think?
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CME, Press Statement, 1 December 2017; CBOE, Press Statement, 1 December 2017 (pdf). ↩︎
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Bloomberg (Nick Baker, Annie Massa), »Nasdaq Plans to Introduce Bitcoin Futures«. ↩︎
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Wikipedia, »Efficient-market hypothesis«. ↩︎