Last December, when we saw the Bitcoin futures market complex come into existence – first on the CBOE, and then on the CME a week later – it left a psychological scar in the crypto world that still resonates today.
Naturally, while financial theorists and academics continue to spin tales suggesting that Bitcoin futures actually hurt Bitcoin (and continue to do so today), the reality is this: by mid-December, excitement about Bitcoin had reached a fever pitch and the “bubble” was in full blossom (why do you think CBOE and CME were so eager to establish futures in the first place?). A market in that state is extremely fragile and any new catalyst can spark the needed deleveraging process. It’s a state of imbalance. And the universe abhors imbalance.
Moreover, it wasn’t the fact of Bitcoin futures coming into existence that caused Bitcoin to go down. It was the unsustainable parabolic rise in Bitcoin in the first place that caused Bitcoin futures to come into existence. However, as noted above, it left a scar.
This isn’t to suggest that Bitcoin can’t surpass its former highs. It surely can over time. However, a parabolic market mania is a parabolic market mania. It is unsustainable by definition. The advent of the futures market for Bitcoin was a well-timed crowning catalyst, much as we often see today when a group of stocks finally gets noticed enough to be crowned by a new ETF instrument. That invariably marks a top. Check out “FAN” for wind stocks, or “TAN” for solar stocks, or “MOO” for agriculture, or countless other examples. New financial instruments are often a symptom of a speculative imbalance rather than the cause of an inflection.
That takes us to the present day, and what, if anything, might result from the advent of Ethereum futures.
First and foremost, markets are highly susceptible to post-traumatic stress disorder. In other words, the establishment of a “bogeyman” in the narrative of recent market history will impact how people position capital afterward, particularly when there are signs of the reappearance of that same bogeyman in the narrative.
In this case, the launch of an Ethereum futures contract in London in early May likely presented traders with a strong sense of “Oh no, here we go again!”, especially since Ethereum had rallied more than 100% in a single month into that launch, and subsequently started to decline immediately afterward.
However, while these fears may have a rational hook into the fabric of reality, there is another narrative that may deserve consideration.
The Big Point of Crypto Futures
At present, the principal use of the Bitcoin futures markets is for large-speculator hedging activity, according to CFTC reports. The data is incontrovertible at this point. The latest Commitment of Traders report for Bitcoin futures from the CFTC showed large specs carrying 1,945 contracts net short on CBOE and another 377 net short on CME.
In other words, big players (crypto hedge funds) are carrying large short positions in Bitcoin futures most likely as a hedge against regulatory hurdles to offset large bullish bets on speculative alt-coins.
This is the future of the cryptocurrency space: find the next coin that is going to ramp from $25M to $2B in market cap. These are lotto ticket bets. But in an inefficient market, that’s a reasonable strategy, especially if you can segment out and cancel the risk of broadly negative regulatory developments that hit the whole of the crypto landscape.
Where’s the Opportunity?
In itself, this is not a negative for Bitcoin. Those contracts held short are offset by small speculator long positions. But, more importantly, we are no longer in a crypto bubble. We are firmly deep into a crypto bear market that may be nearing its depths. Hence, the introduction of a new major futures contract that gives funds more access to hedging matter isn’t likely to have the same impact as it did in either of the prior two instances.
That’s where the interesting opportunity arises for Ethereum traders: the one thing you can probably bet on is that there is lots of money that “wants” to be in Ethereum, but is sitting on the sidelines because it doesn’t want to buy in front of the announcement that CBOE or CME is about to launch a contract.
In other words, it is hardly far-fetched to contemplate the idea that the Great Crypto Bear of 2018 might well be book-ended by the launch of major futures contracts in Chicago: Bitcoin Futures marking the birth of the bear, and Ethereum Futures marking the birth of the new bull.
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Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Global Coin Report and/or its affiliates, employees, writers, and subcontractors are cryptocurrency investors and from time to time may or may not have holdings in some of the coins or tokens they cover. Please conduct your own thorough research before investing in any cryptocurrency and read our full disclaimer.
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