The Imminent Arrival of Bitcoin FuturesDecember 5, 2017
It is safe to say that there are not many bitcoin traders who are not eyeing two dates with keen interest: December 10 and December 18. On those dates, all previous so-called big traders will become minuscule when CBOE and CME Group start their BTC futures contracts. The event is the first in the history of not only bitcoin but the whole cryptocurrency ecosystem.
In the coming days, most traders will try to adjust to the changes that are coming like a giant tidal wave. The same wave will impact not only the previous “trader whales” but also pretty much everyone who willingly ignores this new situation. This is especially true to the impact that a derivatives market can produce on an underlying commodity.
In the current bitcoin cash market, the whales that exist simply share their space with other BTC entities and have no general need to attack them. The reason for this is simple. Everyone active in the bitcoin cash market is incentivized financially to keep the price of BTC as high as possible. How will the appearance of BTC futures and their offer by these huge financial companies change that?
The New Form of a Dip and Rise in the Market
In its current setup, the bitcoin cash market does see occasional dips in the value of this cryptocurrency. This occurs when the traders are deciding to take their profits off the market. Yet, when it comes to the futures market, the reward is equally high for both seizing the moment when the market moves up and down.
Huge wealth can be made while trading in a falling market, where opportunities are bountiful as those in the rising one. Incentives exist on both of these polar opposite market movements.
The simplest way to perceive this is to observe BTC cash market as a river. Its flow is related to constant factors, so it generally moves in one direction. When it comes to the BTC futures market, the cryptocurrency behaves more like an ocean with currents that are connected to several variables.
In this setup, the participants in the futures market do not have the incentive to always be friendly. Instead, a bigger fish eats smaller one type of ecosystem forms, which is always and everywhere, here included, driven by profits.
The Reactions so Far
As the bitcoin forums on Telegram, Slack, or Reddit show, the community is definitely awaiting this new chapter with a general sense of optimism and happiness. This is mainly related to the idea of the growing value of bitcoin as a currency.
But, some analysts believe that this is the result of the same community failing to understand how the futures markets work. Firstly, there is the wrong notion that futures markets operate in a similar manner like the cash market.
Individuals and companies use these to acquire BTC and they employ it however they want – as a form of Hold savings, regular monetary means for purchases, online betting or even something else entirely.
Following that logic, the futures market is the same thing. However, this is not true as these two markets are, in fact, diametrically opposite. Cash markets, meaning bitcoin exchanges and stock exchanges, are mainly used by optimists. The futures markets are primarily populated by those who are best described as pessimists.
Primary Purpose of the Markets
Another way of looking at them includes their primary purpose. Cash markets were created for the investors who use their surplus funds to create a profit. Futures markets were created to act as a hedge against risk. Investors access cash markets because they believe that the price of their asset will gradually (or even suddenly) rise.
Hedgers, on the other hand, go to the futures market because they want to stop the price of an asset from moving against them. In the cash markets, the investor cannot sell the underlying asset they do not own. Even those traders who operate on the concept of short selling use the process of borrowing those assets before they begin shorting.
The futures market includes no similar constraint. A trader can sell whatever they own, regardless if they hold the underlying asset or not. For example, a corn farmer decides to sell futures contracts because he believes that the price might fall. This way, he can guarantee a price of this product when the harvesting period comes.
A manufacturer, on the other side of the equation, decided to buy a futures contract because he fears that the price of corn will rise. This way, he makes sure that the caps the same price beforehand. As this shows, both the buyer and the seller are pessimistic about their decision.
A New Territory
The corn seller and corn buyer example shows that two hedgers operate on the opposite sides of the market. This way, they manage to create a form of equilibrium. Naturally, speculators and the market makers are required to make additional liquidity. They, for the most part, utilize the existence of true hedgers.
When it comes to the bitcoin futures market, only miners and the current bitcoin holders need to hedge. Miners can sell future contracts to guarantee that they get some predefined price for the coin they plan to mine. Bitcoin owners would be able to the same with the purpose of hedging their downside.
Yet, there are not logical hedgers on the buying end of the spectrum, and this will certainly create pressure directed on the downside. This is why the speculators are the only group that could keep the price steady or even possibly causes it to rise.
Bulls and Bears
Unlike bitcoin holders and miners, the speculators are combined of both bears and bulls. The cash market has been able to demonstrate the power of the bulls.
Now, with the introduction of the futures market, the power of the bears will also become more apparent. Do the bulls have the power to overwhelm the bears, or can vice versa happen – all theories are anyone’s guess.
Similar to all big changes in the digital domain, including eSports or social media, the bitcoin futures will also have a strong digital-only component no one still understands. However, it is clear that anyone who is holding large amounts of bitcoin right now should quickly become familiar with the futures market.