Bitcoin Futures soon to be traded in the Present
Sunday the CME begins trading Bitcoin futures, then the following Monday the CBOE follows suit. What will this mean for the price of bitcoin that skyrocketed from below $1,000 to above $22,000 on some exchanges this year? I will take a look at some of the potential thinking behind traders who will be eager to take part in these future trades. First of all, futures are not like options. They do not carry limited risk where you can only lose what you invest as with option buying, instead both the buyer and seller have unlimited liability as they are obliged to buy or sell at the agreed upon price at the agreed upon date, unlike options where an option can simply expire worthless. For this reason futures investing is not for the faint of heart. Were it simply options I would probably buy some put options to play a healthy pullback from the recent meteoric rise and only risk a small amount. However, I would not feel confident enough to wager a guess at where the price will be at any point in the future based on this year's wild, unpredictable rise. Therefore the people trading will be larger investors making speculative wagers as well as people hedging their holdings. 40% of bitcoin is held by only 1,000 people. That is an incredible amount of wealth in any one asset, so there are fears that instead of trying to sell massive blocks and causing the bitcoin price to fall, some large bitcoin holders will instead hedge their bets with futures. Bitcoin miners may do similar hedging to lock in these high prices for some of the bitcoins that they have and will soon have from mining to remove the risk of having a large store of mined bitcoins that are worth considerably less than they currently are. There are many massive bitcoin mining operations now, some generating $1.5 million per month, but a drop in the bitcoin price obviously would drop those profits, so hedging a portion of their position by locking in at these high profit levels would be prudent.
On the other side of the bitcoin will be all of those investors who had never invested in bitcoin because they never had a regulated way to do so. This argument doesn't carry as much weight for me though. I first looked into investing in and even mining bitcoin in the early days when it was only a few dollars, but back then buying was not an easy process and mining even less so. Had there been a simple stock equivalent I could have just bought with my trading account I'm sure I would have thrown a few hundred or a thousand dollars at it. A small investment of $1,000 around the first days of bitcoin would have been worth $250 million at the recent highs so those who took the time to find a way to invest or mine and were patient enough to hold were duly rewarded. However, now it takes seconds to open an account that can trade bitcoin. Coinbase requires just some basic information and you're ready to go in no time and they had over 300,000 people sign up around the US thanksgiving alone. Everyone is talking about bitcoin and those who want to invest already have. It's not like the early days when you could throw a few hundred dollars at it and strike it rich, now people have to put a significant amount of money to buy even a fraction of a bitcoin. Add to that fact there are about 30 ICO's coming out every day, many being scams, so everyone is trying to get rich quick with the next bitcoin run, but don't expect bitcoin or any other cryptocurrency to be able to reproduce this year's massive run up again. Plus the average small investor is not going to be trading bitcoin futures, which would be much more complex , risky and costly than the simple digital wallets they have now. Some institutions will use the futures no doubt, but the theory that all the pressure will be from the buying side is one that I don't subscribe to. I have no idea where the price of bitcoin will go in the near term, nobody does, but just based on the reasons that I've outlined I expect a bit of a hedging and profit taking selloff or pullback. Longer-term blockchain technology has massive potential as does a universal cryptocurrency. Whether bitcoin is the long-term winner and solution to many currency issues though will remain to be seen. Google was nowhere to be found when the first search engines of the internet were created, yet most of those names are long gone while Google expands to unfathomable size and heights. Bitcoin was just the first movers and is the first name people know, but even within bitcoin they have already had one fork into Bitcoin Cash, which has an 8 MB block size compared to only 1 MB for Bitcoin, which would allow larger transaction volume and lower fees. Although many other cryptocurrencies have moves up with bitcoin the recent 50% spike just over the past week was not followed by its main competitors. Bitcoin transactions are slow (with only a few per second) and costly (already consuming more electricity than many entire countries), while Visa by comparison can process hundreds, even thousands of transactions per second for negligible costs. Even though blockchain technology and bitcoin have been around for over 8 years now it is still early days and what the future(s) hold is anybody's guess.