At the time of writing this, the Bitcoin value just saw some tumultuous fluctuations. After hitting an all time high of 20,000 USD per bitcoin, the start of Bitcoin Futures trading saw a 9000 USD drop in the value of the cryptocurrency. While there are those who consider this to be a much needed course correction, many believe that the cause of this fluctuation is because of futures trading.
Before we get into the impact of futures trading on Bitcoin, we have to understand what futures trading really is. Think of it as a contract between two people who agree to transact on a commodity at a fixed price. Note that you’re not actually purchasing the commodity from the market; the market facilitates a buy/sell agreement between two players via a standardised contract.
Taking a page out of the history books
The commodity market generally trades physical commodities like metals, crops and financial instruments. Now, Bitcoin can be thought of as both – a commodity with store value, and a financial instrument, in that you can transact with it. Frankly, there hasn’t been anything like Bitcoin that has traded on the commodities market. But looking at the behaviour of prices of commodities like gold, silver and platinum would give us some idea as to how futures trading has affected commodities.
The CME group first began trading gold in 1974 at a price of 175 USD per ounce. A year after its launch, it dropped 20% after a quick increase in price in the early days. Five years later, in 1980, Gold hit an all time high of 559 USD per ounce.
Now obviously at the first glance, it looks like Futures trading affected the price of gold favourably. However, according to a research by MasterTheCrypto, it is revealed that the inflection points for the growth of gold prices coincide with socio-political movements like the 1973 oil embargo or the 1979 Soviet Afghan invasion.
In the case of gold, merely adding Gold Futures didn’t really affect its prices.
Silver futures have been trading on the CME long before gold; it dates back to 1933. At the time of launch silver futures traded for 0.35 USD per ounce. A year later, its value remained unchanged. 5 years later, it saw a 23% increase to 0.43 USD.
Again, the research conductor argues that growth coincides with socio-economic events like the end of the world war etc.
This trend can be observed for other precious metal which are considered a good store of wealth, like platinum etc. World events affected its price more than the introduction of futures trading for the metal.
You get the point – if precious metals like Gold, Silver etc are anything to go by, the growth trend of bitcoin may not be affected at all because of futures trading.
Bitcoin has a fundamental difference between all of these precious metals. The entire supply of gold, silver and platinum is not know. Bitcoin on the other hand, has its supply capped at 21 million, of which 16 million is either owned or circulating in the market.
Another recent statistic shows that 40% of Bitcoin is owned by a handful of people. So what we have here is unprecedented interest among investors for a very small amount of commodity. Many believe that this disproportionate demand and supply of Bitcoin in the futures market might just add to the volatility of its value.
The futures threat
Noelle Acheson from the CoinDesk’s product team provides a counter argument in his acclaimed opinion piece on December 8th, titled “the threat of Bitcoin Futures.” Here he says,
“For every $100 million (or whatever) that SupermegahedgefundX puts into bitcoin futures, no extra money goes into bitcoin itself. These futures do not require ownership of actual bitcoins, not even on contract maturity… I’m concerned that institutional investors that would have purchased bitcoin for its potential gains will now just head to the futures market. Cleaner, cheaper, safer and more regulated.”
He argues that while the introduction of a liquid futures exchange will increase the likelihood of the Winklewoss Twins’ pet project – an SEC approved Bitcoin ETF, and consequently bring in more money into the system, there might be those investors who don’t believe in Bitcoin, and can follow through with their conviction by selling bitcoin futures contracts at a lower than market value. This would send disastrous signals to the market, and would be particularly scary during a bitcoin value descent.
From the time that futures trading started, we have already seen a massive correction and a stabilisation of sorts that has followed. I suspect that the commodity market will consider bitcoin as an attractive store of wealth and going by past data, futures trading itself will not result in tremendous increase or decrease in Bitcoin value.
However, the crypto world in general hasn’t seen the power of Wall Street money and market manipulators will be at large, trying to make the most of such a volatile commodity. Its scarcity also adds uncertainty to the mix, as someone with relatively less amounts of bitcoin trading either way can really affect the market.
One thing is clear. The regulations of cryptocurrency and the following embracement from regulated markets like the CME and the CBOE marks the end of the beginning of cryptocurrencies. Will it take bitcoin to new heights or will it destroy it once in for all; it remains to be seen.
I would like to bet on the former.
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