There is optimism surrounding Bitcoin futures, but is it misguided?
Generally, joy and optimism are awaiting the new market players that will join the Bitcoin realm, their pockets full of fresh cash to invest and add to the demand, when futures are traded by CME and CBOE on Dec. 10 and 18.
The news from CME even sent Bitcoin price to a new all-time high of $7,000; thus it is unsurprising that the small fry on forums and around the dinner table are excited about the prospect of new investors coming in on the backs of futures.
But futures are scary things, and perhaps there is also a dark side coming to the Bitcoin market as now people can profit just as much from the drive diving as they can from it rising. There could be some big swells from some big whales on its way.
How futures can affect Bitcoin
As it stands, the man with a fraction of a coin is as happy as the man with 100 the way the Bitcoin market operates at the moment. The more the price rises, the happier each of them are. Higher price means better returns and more money for nothing.
There is no need for the big name players in the Bitcoin market to cause too many waves as they are currently profiting happily from the way things are going. However, futures introduce a different type of playing field as whales, and these are whales that make Bitcoin whales look like shrimp, have an incentive to drive the market down.
Cash markets, such as Bitcoin, are there to serve investors, but a futures market is something different, it is there for people to hedge against risk. It is a pessimistic way to invest, and it bases itself on profiting when things go bad.
A farming analogy
Futures are seen a lot in farming as crops are subject to so much volatility (from pricing and markets to weather and pests) so a farmer will sell his corn on a futures market to guarantee the price when he does eventually get his crop to market.
At the same time, someone who wants the farmer’s crops will buy that futures contract in the hopes of securing a price should the price of the crops rise. Both of these players are now hedging on opposite ends and a balance is essentially struck.
Back to Bitcoin
Understanding futures like that, and applying the model to Bitcoin, there is a clear gap.
Miners sell their ‘futures contract’ to make sure they get the price for the coins they intend to mine in the future. Bitcoin holders are doing the same sort of thing in order to hedge their downside.
But now, there is no hedger on the buying side, so there is no equilibrium and the pressure is asserted on the downside. There is balance coming from the buyers, the speculators, but that equilibrium has always been met by a strong Bull market.
Now, there is a reason to be a strong bear with Bitcoin futures as three is profit to be made hedging against Bitcoin. Those entering the market, flush with never before seen cash, could enter as a bear and do all they can to drop the market.
Because the market is still just in its infancy, there is a chance that bears could overwhelm it, and still profit.