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Bitcoin futures market: what can happen after the start of trading


All Bitcoin traders should note two important dates in their calendars: December 10 and December 18. It is these days that the CBOE and CME group will begin trading in Bitcoins futures and options. Later, other traditional exchanges can join them. At the same time, not all traders understand that these events mean for the community and how the situation in the last two weeks of 2017 can change. The market of trade Bitcoin can be compared with the river. Its flow depends on constant quantities, and therefore it usually flows in one direction. On the other hand, the Bitcoin futures market is similar to the ocean with thermohaline circulation: its flow depends on several variables. Sharks of the futures market are not friendly at all - they will do everything to earn money, even if they have to go through the heads of other market participants.

New Territory

If you study the latest publications of representatives of the Bitcoin community on Slack, Reddit or Telegram, you can be sure that there is optimism in social networks about the price of Bitcoin in connection with the forthcoming opening of futures trading on large commodity exchanges. This optimism is a product of a lack of understanding of how futures markets work.

There is a misconception that futures markets work similarly to real financial instruments markets. However, the principles of these markets are diametrically opposed. Markets of real financial instruments (for example, stock exchanges and Bitcoin exchanges) were created for direct investors, and the futures market was created for insurance against risks.

Investors go to the markets of real financial instruments, because they believe that the value of assets will increase. Hedgers go to the futures market, because they do not want the asset price to go sideways. You cannot "sell" in the markets of real instruments, if you do not already own the underlying asset. In futures markets there are no such restrictions. You can sell, regardless of whether you own the underlying asset or not.

What will happen next

A corn farmer sells a futures contract because he is afraid that the price may fall and wants to guarantee the price for his corn when he collects the harvest. A producer who uses corn buys a futures contract because he is afraid that the price of corn will rise and wants to limit the price that he pays for the product.

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 had 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. 

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