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…
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.
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.
Shipwreck image via Shutterstock
Bitcoin breaks above $12,000 for the first time
Bitcoin broke above the $12,000 mark Wednesday morning Asia-time, as the cryptocurrency continued its march higher.
As of 11:33 a.m. SIN/HK, the digital token was selling for $12,198.57, according to industry site CoinDesk.
The asset began 2017 at less than $1,000 per token, but it has been on an absolute tear in recent months: It crossed $5,000 in October and touched above $11,000 for the first time less than two months later, according to CoinDesk data.
With Wednesday morning’s spike, the cryptocurrency now has a total market value of about $203 billion — more than twice Goldman Sachs’ market cap.
All of the digital asset’s explosive growth has come against a backdrop of steady criticism from many financial luminaries.
For one, Stephen Roach, Yale University senior fellow and the former Asia chairman and chief economist at investment bank Morgan Stanley, told CNBC on Tuesday that he was deeply skeptical of investing in bitcoin.
“This is a toxic concept for investors,” Roach, described by Yale as one of Wall Street’s most influential economists, told CNBC. “This is a dangerous speculative bubble by any shadow or stretch of the imagination.”
“I’ve never seen a chart of a security where the price really has a vertical pattern to it. And bitcoin is the most vertical of any pattern I’ve ever seen in my career,” he added.
Yet many elements of the financial world have embraced the new crypto asset class: Major exchanges like the CME and CBOE have legitimized the currency’s investment credentials by saying they plan to introduce futures contracts to their respective exchanges.
Written by CNBC
Token Summit Surprise: OpenBazaar to Launch Layer-Two Coin
“Over the last six months, things have changed a lot, I don’t think it makes any sense for us to be bitcoin only.”
That’s according to Brian Hoffman, CEO of OB1, the development company behind the decentralized e-commerce protocol OpenBazaar, who announced today the project will seek to incorporate a token into its existing product offering sometime in 2018.
Announced at Token Summit II in San Francisco, the news was revealed onstage by Hoffman, who indicated that it represents a response to ongoing congestion on the bitcoin network that he said has made it less useful for payments.
Still in its early stages, the white paper for the OpenBazaar Token (OBT) will be released in Q12018, with the goal of soliciting feedback from the community before any sale, Hoffman said.
However, Hoffman continued, that feedback process has already begun.
For example, he reported the idea has been floated around to industry insiders to get a sense of the reaction. One of the more notable and beloved projects built on the bitcoin protocol, Hoffman suggested he expects the response to the move will be critical.
“I’ve already floated it to people who will give me shit, so I have a sense of what we’re going to get,” Hoffman said.
As such, his comments echo other bitcoin entrepreneurs who have embraced a business model that includes the use of alternative protocols with publicly traded tokens. Earlier this year, startups Storj and Tierion, for example, made similar moves to varying degrees of backlash.
Still, Hoffman cautioned that this move can’t quite be equated with those decisions, as OpenBazaar will still use bitcoin as its main protocol. Rather, OBT will be used to reward the users of a forthcoming “channels” feature, in which fixed addresses for commerce would be auctioned off in a real-time bidding process.
As revealed in May, the channels feature was planned for the project’s Milestone 2 update, but was pushed back in development.
Hoffman explained that channels would be a way for solving OB’s discoverability problem.
The new feature is “basically a way for anybody on the network to make a curated list of content.” Hofman said, adding:
“You will be able to monetize that value to the network through the token”
Brian Hoffman at Token Summit II image via Brady Dale of CoinDesk
Written by CoinDesk
Ukrainian Shipping Company Plans to Accept Bitcoin as Payments to Avoid Sanctions
Ukraine-based shipping firm Varamar Ltd. is reportedly planning to accept Bitcoin as a method of payment in order to bypass sanctions being imposed on certain countries where companies want to do business with the shipper.
By using Bitcoin, the firm will avoid the voluminous amount of paperwork related to international payments, as well as lower fees for all parties involved in the transactions.
According to the firm’s founder Alexander Varvarenko, the use of Bitcoin facilitates the conduct of business with their customers in countries where sanctions are being imposed, as well as reduces the paperwork of the transactions.
“Paperwork for transactions is a complicated issue with banks, and Bitcoin payments will help solve that by being faster. It could also help solve payment problems in countries like Pakistan, Russia, Sudan, Yemen and Qatar, which have safe companies but are victims of sanctions being imposed against their governments.”
Benefits and possible disadvantages of using Bitcoin as payment method
By using the number one digital currency as a method of payment, the Ukrainian shipper can avoid doing business under the table and does not break any law.
This is because Bitcoin is not prohibited as a payment method despite being not recognized as a legal tender in Ukraine. The recent move from Ukraine lawmakers signal that they might move towards exemptingcncy income and gains from taxes. By utilizing Bitcoin, the company and its customers can still sign official contracts for services rendered and anyone who will scrutinize the transactions will find them legal.
However, there may be negative repercussions against the shipping company if it pursues this plan as the sanctions imposed on certain countries have a purpose and are agreed upon by the international community. By circumventing these sanctions, all the parties involved are sure to face the full force of the law once they are caught in the act.