Skip to main content

Bitcoin Futures: Make Way for a New Kind of Whale

For bitcoin traders, all eyes should be on Dec. 10 and Dec. 18.
That's when former self-styled bitcoin whales will be swallowed up like plankton as the CBOE and CME Group launch bitcoin futures contracts for the first time in history.
Over the next few days, I will be providing information on trading in the bitcoin futures market. My goal is to shed some light on its peculiarities and hopefully help people avoid mistakes. To start, it won't just be the whales that will be devoured, but any other smaller crustaceans that choose to ignore the potential impact a derivatives market can have on an underlying commodity.

You see, in bitcoin's cash market, where these whales exist, they swim amongst other bitcoin marine lives without necessarily attacking their co-habitants. The reason is simple. Everyone in bitcoin's cash market is financially incentivized to keep the price of bitcoin high.
Sure, the market sometimes takes a dip, but that’s because some bitcoin holders are taking profits off the table. In the futures market, there is as much reward for the creatures on the downside as well as the upside. Tremendous wealth can be created in a falling market as it can be in a rising market. There are incentives on either side.
Essentially, bitcoin's cash market is like a river. Its flow is dependent on constants and so it generally flows in one direction. The bitcoin futures market, on the other hand, is like an ocean with thermohaline circulation: its flow is dependent on several variables.
Marine life in the futures market is not as friendly. The waters are infested with killer whales. Apex predators that feed on other whales. They even feed on themselves.
Alright, enough of the marine analogy...

Changing tides

Journey through any of the bitcoin forums on Slack, Reddit and Telegram, and there is general happiness and optimism about the value of bitcoin with the advent of a futures market.
This is born from a lack of understanding of how futures markets work.
There is this misguided perception that the futures markets work in a similar fashion to the cash market. In fact, both markets are diametrically opposite.
Cash markets (e.g. stock exchanges and bitcoin exchanges) are primarily populated with optimists. Futures markets, on the other hand, are primarily populated with pessimists.
Put another way, cash markets were created for investors, while futures market were created to hedge against risk. Investors go to the cash markets because they believe the value of the assets will rise. Hedgers go to the futures market because they don’t want the price of the asset to move against them. You can't "sell" in the cash markets if you don't already own the underlying asset. Even the short sellers borrow those assets from owners before shorting.
The futures market has no such constraint. You can sell whether you own the underlying asset or not. A corn farmer sells futures contract because he is afraid the price may fall and wants to guarantee a price for his corn when he eventually harvests it.
A manufacturer that uses corn buys a futures contract because he is afraid the price of corn will rise and wants to cap the price he pays for corn.
Both buyers and sellers in their own way are pessimistic.

Uncharted waters

In the corn futures market, the farmer and the manufacturer are natural hedgers on opposite sides of the market. Thus, they create some sort of equilibrium.
Of course, market makers and speculators are required to create additional liquidity, but they, for the most part, rely on the existence of the true hedgers.
In the bitcoin futures market, the only groups that need to hedge are the miners and current bitcoin holders. Miners will sell futures contracts to guarantee they get at least the given price for the bitcoins they plan to mine in the future. Bitcoin owners will do the same to hedge their downside.
There are no natural hedgers on the buy side. This will inadvertently create pressure on the downside.
The only group left to keep the price steady and maybe even cause the price to rise is the group of speculators. Unlike the miners and bitcoin holders, the speculators will comprise of both bulls and bears. For the most part, we have seen the power of the bulls in the cash market, but until the introduction of the futures market, we had not seen the power of the bears.
Could the bears overwhelm the bulls? Vice versa? No one knows. Is the introduction of futures going to lead to an increase in bitcoin price? No one knows.
What is clear though is if you currently hold enough bitcoin to be classified a whale, you better familiarize yourself with the futures market. Simply drifting in the ocean hoping for the best is not a strategy. Well, it is a strategy, just not a very good one

Link:https://www.coindesk.com/bitcoin-futures-make-way-new-kind-whale/https://www.coindesk.com/bitcoin-futures-make-way-new-kind-whale/

Comments

Popular posts from this blog

Case-By-Case or Cease-and-Desist? In Search Of a New Approach to ICOs

That rumble you hear is the sound of regulators around the world mobilizing resources to tackle the pressing matter of token sales. Yet, in spite of the spectacular growth of blockchain token-based funding, no one seems to have a clear idea of what type of rules to introduce. The resulting uncertainty (not to mention ridicule) is left hindering progress as money flows to unviable projects and investors are left vulnerable to foul play – exactly what regulation is supposed to prevent. Perhaps a new approach is needed. But to see where this could go, it's worth stepping back and asking what we expect the regulation to do. Safety belt First, why do we need regulation, not just of finance, but of anything at all? To protect us. At its roots, that is the main role of government – to protect its citizens from avoidable harm and extreme loss brought about by others or from our own lack of common sense. When it comes to securities, that usually means stopping us from making poor decisions…

Duncan Logan just tweeted that he's on board Electroneum

I have been a buyer and holder of bitcoin and Etherreum for a long time but this will be the first ICO I buy into--Duncan Logan.

What is Electroneum?

Electroneum (ETN) is a cryptocurrency that can be mined with a smartphone, requiring almost no technical knowledge or prior experience. This sets it apart from other cryptocurrencies (like Bitcoin) which require expensive hardware and technical know-how to mine.
Electroneum’s unique mobile mining experience allows anyone with a smartphone to earn ETN coins by letting the miner app run in the background.
It was designed specifically with mobile users in mind, thereby appealing to a potential market of 2.2 billion smartphone users around the world. Unlike other cryptocurrencies, Electroneum has a user-friendly, beginner-oriented interface that allows users to seamlessly transfer ETN coins between one another, check their balances, and mine coins.
Being a cryptocurrency, Electroneum is created, held, and spent electronically, and has no phy…

Inglourious Basterds Script - Dialogue Transcript

oila! Finally, the Inglourious Basterds script is here for all you fans of the Quentin Tarantino movie. This puppy is a transcript that was painstakingly transcribed using the screenplay and/or viewings of the movie to get the dialogue.

Inglourious Basterds Script(DISTANT RUMBLING) (SPEAKING FRENCH) (MEN SPEAKING GERMAN) (SPEAKING FRENCH) While I'm very familiar with you and your family, I have no way of knowing if you are familiar with who I am. Are you aware of my existence? Yes. This is good. Now, are you aware of the job I've been ordered to carry out in France? Yes. Please tell me what you've heard. I've heard that the Führer has put you in charge of rounding up the Jews left in France who are either hiding or passing for Gentile. The Führer couldn't have said it better himself. But the meaning of your visit, pleasant though it is, is mysterious to me. The Germans looked through my house…