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.

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.