Why Futures Trading on Bitcoin May Plummet Its Value Over Time
Chicago Board of Exchange (CBOE) has created a new dimension to the Bitcoin craze following its launch of the Bitcoin futures on December 10. This launch created such a frenzy that the market had to stop trading twice because of the CBOE speed breakers that slow or pause trading if price movements become excessive.
Reasons Why Futures Trading on Bitcoin May Plummet
Other markets that are set to launch their Bitcoin future trading include the Chicago Mercantile Exchange (CME) which is planning to launch on December 18th and Nasdaq that is planning to follow suit come mid-2018.
This trading will allow speculators to predict Bitcoin prices in the future as they place trades today. At the time of the launch, the price for one Bitcoin was at USD $15,000 which later surged to an all time high of USD $18,300. It is the difference between the two prices that the traders get as profit. The futures trading created such an excitement pushing the coin to its all time high. While this is good news for traders, it could be just the beginning of a down hill path for the coin.
According to analysts Bitcoin futures trading could eventually start pushing its price down. Future trading allows traders to bet against Bitcoin and pay off their contracts using fiat currency like dollars. This window boosts their liquidity. They can also trade on this coin without even owning it, cushioning them against volatility in the real-time market, thus reducing Bitcoin demand and pushing down its price as a result.
Despite crypto future trading being a new concept, the idea of future trading has been in existence since time immemorial. For instance, in 1750 BC, Babylon King, Hammurabi introduced a new legal code in which traders would agree upon a price of goods that would exchange hands at a future date. In the contemporary market, the idea remains the same. One person agrees to purchase a given amount of securities or commodities at a future date but at agreed upon price. The seller agrees to deliver the same as at that particular date.
The market has hedgers and speculators. The former aim at protecting themselves from future price drops while the speculators buy contracts and hope that their prices will go up in the future. Hedgers simply buy or sell commodities hoping to lock in a given price against it falling in value. The speculators on the other hand hope that the price will go up for them to make a profit.
In modern trading, traders must trade the futures contracts on standardized platforms such as CME and/or CBOE. Having Bitcoin on such a platform will encourage more traders to take seriously the digital currency allowing the crypto-currency to get into the mainstream market. The good news is that established institutions such as Goldman Sachs have plans to clear Bitcoin futures for some customers.
This move will boost the crypto-currency’s value as it gives it more credibility. The coin’s hedgers will now hold on to it and hoping for it to remain stable while miners can receive advance cash from speculators as they hope to make profit at a later date.
On the downside though, Bitcoin will finally face the scrutiny of regulators. Digital currency has been enjoying unlimited freedom with traders exchanging currencies without the need for bureaucracies common with institutional trading. Futures Industry Association has already warned the US regulator that Bitcoin has not received enough risk assessment to ascertain its stability.
Other regulators have followed suit following the launch of Bitcoin futures. The Hong Kong’s regulator warned that only those firms with licenses can give such services within the country’s environs. The Korean Financial Services Commission regulator gave a directive to securities firms not take part in such transactions.
Another sad fact is that the level of Bitcoin future trading has slugged in the past few days after the launch. Compared to the regular currencies, Bitcoin volumes have been relatively low. Perhaps traders are still skeptical or still don’t understand the crypto-currency dynamics.
Introduction of Bitcoin future trading has in some way added to its legitimacy, but the low level of interest from established institution is worrying. If the trend continues, Bitcoin’s bubble could inflate further to its bursting point, just like the tulip bubble burst in 1637. The tulip bubble burst a little under a year after the Dutch introduced the bulb future trading. Will history repeat itself? It’s a wait and see game.