We are just a matter of days away from bitcoin futures being made available as tradable assets by CME and CBOE, which are launching their markets on Dec. 10 and Dec. 18. respectively.
Take a look through some of the crypto specific discussion sites and read some of the more popular news outlets in the sector and you will see an overwhelmingly positive response to these above-mentioned launches. That bitcoin futures will be available to trade must surely be a good thing from a long-term adoption perspective, right?
Well, yes and no.
There is a downside to the situation that many of the optimists seem to be ignoring and it’s one that might temper a bullish attitude somewhat at initial presentation. As we will get to shortly, however, even this might not be enough to stop the launch of bitcoin futures propelling price higher longer term.
In order to explain what we are talking about, it’s first important to talk a little bit about what futures are and, specifically, their implementation in this space.
A futures contract is a contract that stipulates that an individual will buy or sell a particular asset for a set price on a specific date in the future. In the commodities markets, farmers deal in futures as a hedge against the risk of falling prices in the commodity they produce (say, corn) while, on the other side of the equation, companies like airline operators deal in futures to hedge against the risk of an increase in the price of fuel for their aircraft.
These are just two examples, of course, but what’s important to realize is that the ability to buy and sell futures contracts means that money can be made on both sides of the market. Right now, it’s pretty difficult to short sell bitcoin and there’s basically no market for it on the bitcoin cash market. This means that the vast majority of positions are incentivized to push the market price of bitcoin upwards.
Once there is an active futures market for bitcoin, however, there is an incentive on the short side of the equation as well as on the long side. This means that there is potential for large gains to be made as price falls and, in turn, opens up bitcoin to potential manipulation on the short side, as we see in many of today’s more traditional financial asset markets.
The fact that it will soon be far easier to short bitcoin, therefore, is a major concern and one that many aren’t really considering right now.
With that said, however, an active futures market also makes it easier to go long bitcoin than is the case currently, and this is where the bullish counter argument comes in.
A large number of people want to gain exposure to the price rise we have seen in bitcoin over the last 12 months but have been unable to do so because buying and storing bitcoin is pretty inconvenient. Outside of these individuals, there are also large numbers of financial institutions that would likely love to pick up a position but that don’t want to have to go through the process of holding it in cold storage (and are, as a result, put off by the limited security offered by online wallets).
With the advent of bitcoin futures, these parties are able to take long positions (i.e. take positions in the expectation that price will rise going forward) without having to tackle any of these above-mentioned barriers.
As such, there is a strong chance that the inflow of speculative buy activity that comes about as a result of barriers to entry into the market being removed will outweigh the impact of bitcoin futures allowing certain parties to take up short side positions on the asset’s future.
To put this another way, it’s about to become a lot easier to go short bitcoin but it’s also about to become a bit easier to go long bitcoin.
We’re willing to bet that the number of participants that will enter based on the former altered situation is far smaller than the number that will enter based on the latter (i.e., the number of longs is going to dramatically outweigh the number of shorts) and, in turn, the net impact of a bitcoin futures market on the price of the underlying asset will be very much bullish.
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Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Please conduct your own thorough research before investing in any cryptocurrency.
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Hong Kong, Hong Kong, 25th January, 2021, // ChainWire //
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