The entry of Crypto Futures Trading in December 2017 for Bitcoin and soon the entry of Options Trading have permanently changed the cryptocurrency market dynamics. While the Traders make their millions weekly through sophisticated large volume automated trading facilities, the Retail market’s dream of being able to pay for a seat in SpaceX to the moon and beyond and/or buy a Lamborghini looks dismally crushed.
Lessons from when there was no Futures or Options Trading in crypto…once happier times!
• The Retail market drove speculative prices higher as a combination of mass media hype and network effects for Bitcoin, as the proxy for the future of cryptocurrencies in the global financial markets. This occurred most markedly in 2017 reaching the peak in late December.
• When some Institutions and such high profile super rich people like the Winklevoss twins and Andreessen Horowitz, Founders Fund, Sequoia Capital and Union Square Ventures legitimised cryptocurrencies, the floodgates opened-up and the rest is history as Bitcoin reached $20,000.
• While the sophisticated rich and institutions could buy large quantities of a growing listing of cryptocurrencies at fractions of cents, the retail investors provided the demand to lift prices ever higher allowing the sophisticated rich and institutional investors to cash-out their profits locking-in huge unplanned wealth transfers.
• If there was no Futures Trading in Bitcoin, its most likely that following the Bitcoin halving, the value would have begun the steady rise towards the last highs of $20,000 and beyond over the next 12 months to search for new highs. The projection graph below shows what has occurred during previous Bitcoin halvings.
• Bitcoin halving events:
o First halving on November 28, 2012 – Price Peak in December 2013 – January 2014
o Second halving on July 9, 2016 – Price Peak in December 2017 – January 2018
o Third halving on May 11, 2020 – Projected Price Peak in December 2021 – January 2022
Projection Graph for 2020 post Third halving on May 11, 2020
The growing influence of Institutional and sophisticated Investors using Futures contracts and Options Trading
The entry of Futures Trading into the cryptocurrency market
• ‘Cryptocurrency enthusiasts took the decision by the Chicago Board Options Exchange (CBOE) to launch bitcoin futures contracts in mid-December of 2017 as a largely positive sign for the leading digital currency by market cap. Bitcoin had already clenched the dominant position among a growing field of cryptocurrencies, maintaining dominance even as newer and flashy alternatives hit the market.’
‘CBOE’s launch was followed just a week later by CME Group, which offered bitcoin futures trading on December 18, 2017. One distinction between the two is that CBOE’s contracts represent a single bitcoin, while CME’s are tied to five coins. The first batch of CME bitcoin futures contracts will expire on January 26.’
The collapse of cryptocurrency prices with the entry of Futures Contracts
• This article in December 14, 2017, by Nafis Alam (Assoc. Professor, University of Reading) accurately predicted the collapse of the cryptocurrencies with Bitcoin as the lead indicator. He explains why: ‘Bitcoin futures could actually end up reducing the price of Bitcoin. Futures trading gives new investors the choice to bet against Bitcoin and also allows them to settle contracts in dollars, boosting their liquidity. Plus, Bitcoin futures allows investors to trade off the cryptocurrency without actually owning it. This protects them from any volatility in the real-time spot market. This could reduce the demand for Bitcoin, pushing down prices.’
• ‘On the flip side, the launch of Bitcoin futures will attract greater scrutiny from the regulators which will cast a shadow on the fate of the Bitcoin in the long run. In this regard, the trade association for the futures markets, the Futures Industry Association warned the US regulator that not enough risk evaluation has been done on Bitcoin and the risks it poses to financial stability.
• The launch of Bitcoin futures has aggravated other regulators, with scrutiny beginning to encircle the cryptocurrency. Hong Kong’s regulator issued a warning that only licensed firms can offer such products within Hong Kong. In Korea, the Financial Services Commission financial regulator issued a directive that bans securities firms from taking part in Bitcoin futures transactions.’ (Source: https://theconversation.com/how-bitcoin-futures-trading-could-burst-the-cryptocurrencys-bubble-88971
The entry of Options Trading into the Cryptocurrency market
• The entry of Options Trading using Derivatives will substantially reduce to a negligible amount the influence of the Retail Investors against the juggernaut Institutional and sophisticated Investors.
• This summed up very clearly by Jay Hao in Options Trading is a huge Step for the Crypto Derivatives Market: “When looking at traditional markets, derivatives typically account for more than four times the trade volumes of the underlying asset. Yet, in crypto, spot trading is still much larger. That won’t be the case for much longer. At OKEx, it is our belief that derivatives will outgrow the spot quickly to become four or five times larger over the coming years. And this growth will be further fueled by more sophisticated offerings such as options trading.” Source: https://cointelegraph.com/news/options-trading-is-a-huge-step-for-the-crypto-derivatives-market
Implications of Futures Trading and Options Trading for the future trends in the cryptocurrency market
• Excluding a “Black Swan” event, there is a dampening effect of futures trading on size of the volatility of those cryptocurrencies within futures trading basket. With Bitcoin’s >60% dominant marketcap of cryptocurrencies, the price trends will largely be predictable, and boring, for those who long for the revisit to the 2017 all year price movements.
• The above graph shows the increasing volumes of daily trades from January 2019 after the crypto-winter following the end of the Bull-run in 2017. Another potential bull-run was smothered by higher volume daily trades that took profits and shorted the markets in sufficient volumes to dampen prices. This trend has continued through to 2020 with continued increase in trading volumes but dampened Bitcoin prices. In 2013 and 2017 bull-runs such consistent sustained increases in daily trading volumes led to a steady rise towards the peak.
Possible events that could lead to unexpected rapid rise in crypto prices despite Futures & Options Trading
The following changes could lead to a decoupling of some specific Altcoins from the influence of Bitcoin price trends. Ultimately, the entry of hundreds of millions of consumers for DApps into the crypto market space will liberate some specific Altcoin, just as the emergence of Apple, Google, Facebook and Amazon even in the face of powerful contrarian voices of Funds & Wealth Managers such as Warren Buffet of Berkshire Hathaway fame.
The Altcoins that provide these key features the retail consumers and the large majority of small-to-medium (SME) enterprises have a very high demand for will most likely decouple from Bitcoin price movement influence. These include:
A major breakthrough in the development of scalability in DApp solutions that are also provably secure, as demonstrated by a major global product implementation that leads to mass consumer adoption and network effects. This is analogous to the rise of Microsoft PC, Apple computer and iPhone, Google search engine, and Facebook which were all initially derided by many of the major establishment Investment Managers.
The availability of DApps that enables seamless on-boarding of consumers in the ability to:
Transfer fiat currency into cryptocurrencies and vice versa
Earn an income (Rewards, Interest, Dividends) on their holdings of cryptocurrencies.
Provide clear Accounting data which can enable investors to meet their Taxation obligations in their country, just as currently occurs with fiat-based fintech Apps
• Global endorsement by Governments of cryptocurrencies as the inevitable future of fintech. This endorsement must be seen through widespread legislation and funding of fintech industry start-up infrastructure as occurred with the computer Technology industry from the 1990s.
• A deepening and prolong global recession resulting from the hugely underestimated impact of the “Greatest Global Economic Lockdown in human history”. Pumping trillions of dollars, Euros, and other individual national currencies into local economies during the lockdown of economic activities with some of highest revenue contribution to GDP, could lead to entrenched consumer pessimism about the future and therefore depressed consumption expenditures. Even the opening of the local economies may fail to fire economic growth. Cryptocurrencies and the opportunities that the Blockchain infrastructure offers to innovate and capture first mover advantages will accelerate demand for cryptocurrencies built on blockchains with provable industrial strength technology frameworks.
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