What does the bitcoin futures contract mean for BTC/USD price in 2018?
Guest analysis by Cameron Bowen of Coinlist.me.
The start of 2017 saw bitcoin floating around the $1,000 level, as we close in on the end of the year, we have seen this market grow over 1700%. The $20,000 handle appears to be the next psychological number people will talk about, however given how bitcoin reacted at $10,000, it wouldn’t be wrong to expect it to fly straight through.
The word ‘bubble’ has been batted around for months now and it is not surprising considering the growth bitcoin has seen. If you were to compare it with other ‘bubbles’, such as the housing bubble, nothing has grown at the rate nor in the time period that bitcoin has.
Gold increased over 500% in its ‘bubble’ between 2001-11, however that was over a ten-year span. The dot-com ‘bubble’ grew by a similar amount in half the time, only to see the Nasdaq composite collapse fairly spectacularly the next year.
Comparing bitcoin to these other markets is difficult because bitcoin and cryptocurrencies are an embryonic asset whereas gold, technology and houses have been around forever.
What is the driver behind this recent bitcoin momentum?
November was a huge month for bitcoin, and the trigger month that kicked off this extreme growth. The announcement that the CME and CBOE were to launch a bitcoin futures contract turned, what was already an excitable market, into a steam engine market.
Having these exchanges offer bitcoin allows institutional investors to participate in the market. This news alone increased consumer confidence and saw momentum catapult upwards.
What a bitcoin futures contract could mean
With the CBOE having launched their bitcoin futures contract and the CME to launch theirs on 18 December we look at how this could affect the market moving into 2018.
The launch signals yet further acceptance of bitcoin as a genuine store of value and paves the way for large investors to speculate on bitcoins price.
Given the reaction we have seen, these investors are looking to fuel the rally, but can this momentum be sustained?
Futures contracts will change the market
Introducing futures contracts changes this market, namely in two ways:
- Large institutional investors can directly trade financial investments directly tied to the value of bitcoin. Meaning that volumes will likely increase.
- It allows for short selling. Meaning that investors can bet against bitcoin without needing to own the cryptocurrency in the first place.
The second point highlighted is a very serious threat to the continued growth of bitcoin. Hedge funds, asset managers and banks will have the option to bet against bitcoin. And there are definitely people out there who do not like bitcoin or what it stands for. Name and point is Jamie Dimon, Chairman and CEO of JPMorgan Chase, who previously referred to bitcoin as a “fraud”.
With the option for investment firms to sell bitcoin we may well see this market begin to behave closer to more traditional assets. Whether this will happen straight away is yet to be seen but I would hazard a guess that large investors will likely approach with caution, setting aside only a small fraction of their portfolio.
Will the futures burst the bubble?
As we have highlighted previously, bubbles have lasted longer than expected and investors would be brave to bet against it right from the off. Picking a top is difficult and often burns you the first few times.
UBS chief economist, Paul Donovan, says “UBS believes cryptocurrencies are a bubble. However, being able to short a bubble does not make the bubble burst at once. Bubbles are by definition irrational.”
With this in mind there is still room for bitcoin to behave erratically but once the market is more accustomed to there being futures contracts, we will likely begin to see the volatility curb and it behave in a similar way to other asset classes.
The introduction of bitcoin futures increases volume and liquidity, which attracts those investors that like an easy exit from their position. This Reduces their risk to any slippage or market variations that might have occurred in a market with less liquidity.
The other participant we will likely see enter the market are arbitrage traders, with two exchange offering bitcoin futures, there will likely be an increased number of traders looking to take advantage of the price differences between exchanges.
Looking forward to 2018
Given what we have said, expectations are likely for yet more volatility with the introduction of the CMEs contract on 18 December, however, in the new year do not be surprised to see bitcoins price action begin to mimic other traditional assets.
When this will happen is near on impossible to predict accurately. With the huge growth we have seen and how much press bitcoin has received, there is still room for this bubble to grow, with first time investors and institutions all still wanting in on the action.