What Bitcoin Futures Means for Bitcoin Price

Trying to forecast which direction Bitcoin futures will push Bitcoin prices is strictly a roll of the dice. What I can estimate with seemingly better certainty is that Bitcoin futures will start to damped the volatility in Bitcoins prices.

Bitcoin Futures will Damped Bitcoin Volatility

The CME is using a 5 exchange Bitcoin price index and the Nasdaq is using a 20 exchange price index. This means that these exchanges pull prices from all these exchanges to calculate a blended Bitcoin price. Market makers and arbitrage players who provide liquidity for Bitcoin futures will then have to protect themselves trading the underlying Bitcoin versus the futures. This means that as they buy or sell futures they will sell or buy the actual Bitcoin on various exchanges. This probably means that all the prices on the bitcoin exchanges should converge to be in line with each other.

Currently there are arbitrage players out there doing this across various exchanges now, but there isn’t really a “master” bitcoin price to tie to. All the exchange move independently of each other. Futures means that all exchanges will start to tie to the futures price and to each other.

What Lower Bitcoin Volatility Means

Lower Bitcoin price volatility is a big deal for Bitcoin. For me its the key driver for Bitcoin to transfer from a vehicle for investment/speculation to a transnational currency. When merchants and service providers can count on Bitcoin prices being stable they will look to accept Bitcoin for their products and services. Currently its very difficult to count on what the Bitcoin price will be tomorrow much less three months from now. This makes Bitcoin unfit for payment methods in many circumstances. Stable bitcoin prices should change all of this.

This could secure Bitcoins place as the defacto global payment method. That would be big.

Pigs Get Slaughtered: Margin Trading Bitcoin

There is a famous saying “a fool and his money are soon parted”. One thing that bothers me about the Bitcoin space is all that all of the people catching this rising tide think they are the Warren Buffet and can’t lose. News flash: you aren’t a great trader. When every crypto goes up everyone looks like a genius. Then they get cockier and their false bravado builds pushing them to trade on margin making even more money.

Then suddenly a sharp drop in price hits a few margin players as the exchange forces them out of their position. This creates cascading margin sales as other people are then forced out.

This article on BI talks about the guys hurt in Bitcoins recent flash-crash. They trade using margin on Bitfinex and when the price tanks they get liquidated at prices they say aren’t fair. Its possible they were forced out at bad prices – but they still would have lost a lot of their holdings. Keep in mind these guys are using margin (very dangerous) on an exchange which is completely unregulated and has major rumors of shady behavior. This accident was waiting to happen.

This brings us to a well known trader saying to all those in the crypto space:

“Bulls make money, bears make money, pigs get slaughtered”

Could the CME delay Bitcoin Futures?

CME Bitcoin Futures Risk

The CEO of Interactive Brokers, Thomas Peterffy issued a letter to the CME requesting delay of the Bitcoin futures launch citing volatility which threatens the entire CME futures system.  The CME has installed bitcoin futures halts for price moves greater than 7%, but Bitcoin has shown it can move much more than that.  Peterffy does raise a good point – if Bitcoin does drop 25% or more in a matter of hours could this “blow up” one of the CME institution leading to margin calls, etc?  The CME has stated that it wants to require much higher margin than other products:

CME Bitcoin Futures Proposed Margin
CME Bitcoin Proposed Margin

I’d surmise that is probably not enough. The main reason is that Bitcoin does not yet have enough correlation with other assets to hedge. If you are long corn and short soybeans there is probably a correlation there that works for some type of hedge. Not so for Bitcoin. There is not yet a verifiable way to hedge a long position in Bitcoin Futures, either. Therefore if major losses are taken in Bitcoin the traders will have to liquidate other positions like oil, or even S&P futures. You could then surmise that a massive loss in Bitcoin futures could hit the stock market overall if traders have to liquidate S&P futures.

CME Bitcoin Price Index

The second issue with all of this is how the CME is creating its Bitcoin Price Index. (FYI The CME provides a reference paper here). Originally the CME included Bitfinex and OKCoin exchanges in addition to 4 others (GDAX, itBit, Bitstamp, Kraken). Bitfinex and OKCoin had to be dropped as they decided to punt US customers. Kraken on the other hand has had major tech issues. A quick search on reddit reveals irate customers complaining for months that you cannot login or place orders. Bloomberg too has picked up on this story here.

I bring this up because the CME is basic its prices on exchanges which may or may not be in existence in the very new future. When Bitcoin traders start to fear the viability of an exchange the Bitcoin price on that exchange can move way out of range relative to the other exchanges (see here).

At the end of the day Bitcoin Futures make sense, but they shouldn’t be launched hastily.  If it launches and breaks, that could end up badly for all those involved and be a permanent black eye for Bitcoin on the institutional level.

Maybe Bitcoin Futures Isn’t Bullish for Bitcoins Price

CME Launches Bitcoin Futures on November 14th. This is a big deal because it legitimizes Bitcoin as a player on the “institutional” stage. It says there is major demand from large players and that the exchanges and regulators see a future in the asset class.

My sense is that Bitcoin owners view this launch as unbelievably bullish for the price of Bitcoin. Bitcoin tends to have younger investors who in general have had nothing but success from owning, trading or holding Bitcoin. They buy and the price goes up. Some well known “old guy” says something bad about Bitcoin, yet the price goes up more. Bitcoin holders thump their chests, mock the “old out of touch” naysayers and go back to talking about their wealth.

By the way, I’m not here to guess what will happen to Bitcoins price. I own Bitcoin and think its an amazing asset. Don’t trade off of what I write here.

Not All Bitcoin Futures Traders are Buyers

Lets say that you are Warren Buffet and you think Bitcoin is a huge bubble (he actually does, see here). If you wanted to express that investment view (i.e. short Bitcoin) its pretty much impossible. He’s not going to open a Coinbase account and start shorting (explanation of why here).  With CME futures though he’d have no problem launching his short orders. Thanks to the exchange he doesn’t have to worry about counterparty risk, regulator risk or operational risk.

For the first time ever these “old out of touch guys” can back up their “bitcoin bubble” views.

Bitcoin, Gold and Futures Trading

Many like to say that Bitcoin is “the new gold” from an investment perspective. Both bitcoin and gold capture the same objectives of getting your money out of the banking system, being an inflation hedge, etc. Bitcoin, however,  is much easier to store and transport. Gold retailers also say Bitcoin is hurting their business.

Gold futures started trading on the COMEX NY exchange in December 1974 and as you can see in the chart below, it didn’t equate to a major increase in price in the months or even years following.

Image result for 1974 gold futures

Who is to say that this has anything to do with CME Bitcoin Futures trading, but its an interesting analog. (Note these chart annotations where on the chart, they’re not mine and irrelevant to this post.)

Between Futures launching on November 14th, and the possible Segwit2x fork  which should happen on roughly the same day its shaping up to be a wild month for Bitcoin.

What Do CME #Bitcoin Futures Mean for Bitcoin

Everyone in crypto is excited about the launch of Bitcoin futures on the CME (Chicago Mercantile Exchange). The CME is one of the largest futures exchanges in the world. A few notes on this as I am reading a lot of nonsense out there:

  • Overall this has to be seen as bullish for Bitcoin and establishes the asset on the “institutional” playing field.
  • Bitcoin futures are CASH SETTLED which means when the contract expires you are charged or credited in USD the difference between the futures price and Bitcoin spot price. If you’re futures contract is $7000 USD and Bitcoin spot is $6000 USD you will lose $1000 USD from your account.
  • Cash settlement means the futures volume doesn’t necessarily translate into actual Bitcoin  volume. That being said I’d wager that Bitcoin volumes would move higher as traders arbitrage the futures versus actual Bitcoin.
  • Yes, some people will hedge with actual Bitcoin but settlement is still a major issue for institutions and will prevent them from trading actual Bitcoin. Essentially Hedge Funds and Banks can’t yet handle the storage and delivery of Bitcoin. (see here) Plus Bitcoin itself hasn’t been explicitly approved by the SEC or other regulatory bodies.
  • LedgerX already launched Bitcoin options which many will use in conjunction with Bitcoin Futures. You can buy or sell the options and use the future as a hedge if you’d like to trade the “volatility” of Bitcoin. You can also express a directional Bitcoin price view using Bitcoin futures and then hedge with options.
  • I find it somewhat ridiculous that this is a grand conspiracy by the banks to take down bitcoin. CME is a for profit exchange and Bitcoin is an asset with rapidly growing demand.

Chinese Bitcoin Ban and Mining Dominance Could Be a Problem

While the world tries to figure out what China is doing in regards to Bitcoin I think there is one serious threat that is not being reflected in the Bitcoin price. While its been widely reported that China is essentially closing all Bitcoin exchanges another news source is reporting that Bitcoin “executives” are forbidden from leaving the country and makes a note that all Bitcoin businesses in China are under threat. Including miners.

So what?

Chinese dominate bitcoin mining, and therefore are the engine of the Bitcoin network. If they shut off tomorrow who is to say exactly what would happen – but the Bitcoin network would most certainly slow way down.

China dominates Bitcoin Mining

While its certainly possible for other countries to pick up what China drops, it wouldn’t happen overnight.

I really do not know how real this threat is, but its important to be aware of what may lie ahead.

More Rumors of China Banning Bitcoin Exchanges

Caixin (Chinese news source) re-upped on the news of some type of Bitcoin Exchange banning. This was after rumors late last week which we talked about here.

While its not clear just what is happening – its even murkier when you’re english speaking and reading second and third degree sources. In times like this I think its best to look at the Bitcoin market itself. In trading there is a saying that the news doesn’t matter – its the reaction to the news that matters.

Here is the Chinese Bitcoin exchange Huobi as of this morning. I’d say the Chinese traders don’t see Armageddon on the horizon.

BTC Price on Chinese Bitcoin Exchange Huobi

Remain CALM: About the China Bitcoin Exchange Ban Rumors

 

Update – it appears that we were right:

Note: this is how I understand the Chinese Bitcoin Exchange situation. Its my opinion only.

The bitcoin, ethereum and crypto markets all fell ~10% on a rumor that china was going to ban bitcoin exchanges. At this point it seems that through translation something was taken out of context. It looks like what China is looking to do is regulate bitcoin exchanges to prevent money laundering. There is a huge difference between “banning” and “regulating”.

Here is a link to the article that appears to have started the fire, as you can tell its a bit tough to understand just what they are saying:

Caixin China Bitcoin News

This reads more like the government isnt allowing exchanges between Bitconi and or Renminbi.

That was picked up by articles like the one below – saying that Exchanges were going to be shut down.

Forex Live markets misleading headline read here.

Hold tight – don’t panic until its clear whats going on.

Will the China ICO Ban Hurt Bitfinex

Its now widely known that China banned ICOs and even asked that ICO’s give money back to investors.

Where this could bring major problems is to exchanges and other entities that use Tether for funding. Tether, as I understand it, could be swept up in the ICO ban and could well be affected by this and China is a huge trading market.

Currently cryptos on Bitfinex like Bitcoin, Ethereum and Litecoin are all trading at a significant discount to US exchanges. Here is a shot between kraken at top and bitfinex on bottom, you can see a ~$200 price difference:

Kraken Bitfinex Bitcoin
Large Price Difference between Kraken and Bitfinex on ICO ban China

It should be noted that OKCoin is down around $4,080 at this time – so its possible that its just asian exchanges being hit harder by the ICO ban.

It will be interesting to see what the shakeout from this China ICO ban is over the next few days. I have a feeling there will be some casualties.

Bloomberg Coinbase Hit Piece – Sell Bitcoins No Payout

This article from Bloomberg talks about a “surge in customer complaints”…up to 293 about Coinbase. The article proceeds to use terms like “scam” and says that people who sold Bitcoin aren’t getting their money in the time frame quoted by the company.

Yes, they do mention that Coinbase is getting a lot of new users – but they don’t define just how many. Its MILLIONS of new users. 

I’m not suggesting that Coinbase has great customer support, or that they aren’t without problems. But linking them to “scams” is ridiculous. Step back for a second and think about this:

293 formal complaints against MILLIONS of new users, hard forks, record volumes.

That ain’t bad. Inconvenient even aggravating for users who need their money? Yes. Scam, no.