Can Trading Bitcoin Futures Burst Crypto Bubble?

The crypto space is full of faceless traders and investors who buy or sell things with enduring value.

People can make a lot of money from this space very easily but they can also be swindled just as easily.

This market space is actually full of believers. They believe that the digital coins, which do not have any physical form, have a value and can retain it no matter what happens.

With such attributes, the crypto coins, especially Bitcoin, has attracted the attention of investors, both large and small.

And, things got even wilder and more enticing with the launch of Bitcoin futures.

By using the Bitcoin futures the traders get an opportunity to speculate on what the price of Bitcoin will be at some time in the future.

If they can bet correctly and the price responds according to their prediction, they can make profits from Bitcoin futures trading accordingly.

Quite naturally, the early investors were euphoric about the Bitcoin futures and it resulted in a series of excessive price movements.

Rise and fall of prices of crypto coins is a very common phenomenon to happen in the crypto space.

Whether it is Bitcoin or Ether, prices do plunge and along with them these coins even drag down the prices of other digital coins as well.

Several crypto analysts and market experts opine that it is this volatile nature of crypto coins that attributes to the decline of investors.

They tend to pull their money out of the riskier assets even if these promise higher growth potential.

They are on the lookout for an alternative that will offer them the opportunity to make profits from crypto easily and with fewer risks.

Bitcoin futures contracts are just the thing that they have been looking for.

It not only allows them to make profits with less risk but also enables them to create a hedge against losses due to the volatile nature of crypto coins and protect their portfolio.

With these attributes, the crypto futures contracts are now used, traded, and held more actively and widely.

What it means for the new investors is that they now need to make sense of this continuously changing crypto landscape, which, however, is pretty difficult, if not impossible, for them.

It is for this reason that the new investors along with the old and established ones look for other reliable yet productive measures of value.

And it seems the Bitcoin futures contracts are the most suitable alternatives.

However, it is quite hard to tell at the moment whether this excitement is a justified one or simply a bubble that is about to burst.

This is because, when it comes to Bitcoin and other digital coins, the usual financial analysis does not seem to be effective or applicable here.

In traditional financial markets which deal with stocks and bonds, an analyst may analyze different stocks to determine whether or not the shares of a particular company are cheap or expensive.

For that they have several different metrics available such as:

The business model
Leadership and
Future prospects.

However, when it comes to crypto, very few, if at all, of these metrics are available to be used to evaluate a coin.

It is the only, and nothing but only belief that can drive the value of a crypto coin alone.

In the crypto space, Bitcoin and Ether are typically considered as currencies.

This is because these are used just like dollars, pounds and other fiat currencies to buy and sell several products and services.

However, there also exists another 11000 or more of such digital coins that are vying to gain acceptance just like Bitcoin or Ether.

However, the problem here is that it is not known what exactly can be considered as a currency when it comes to crypto coins that are stored in digital wallets.

These wallets are just like any online bank account with the only difference that the holdings are not visible to everyone.

All of the digital assets follow their unique technology as their backbone to operate called the blockchain technology.

Every token relies heavily on this technology to get going in the crypto landscape.

The high prices of Bitcoin and Ether by the average measures of value are quite understandable.

These coins are well established and have a large market cap. They also have a much wider user base.

Bitcoin, in particular, has more than 9 million wallets, according to a survey report of Chainalysis, which indicates its prominence in the crypto space.

As for the new investors, the only way to cut through the thicket of so many crypto coins is to choose one that has more value as well as the ability to fulfill their purposes.

And what better an alternative to conventional money can be available to them other than Bitcoin to invest, to hold, or to transfer money to others across the world.

It can even be sent to places where the traditional banking system is hardly available.

However, the fact that its value fluctuates wildly can make it a bit risky to use Bitcoin directly, and Bitcoin futures come to the rescue in that matter.

This makes investing in and trading Bitcoin futures much more feasible and an option which has created such an excitement and increase in demand for this particular product.

Bitcoin is unlikely to fail and will retain its value, of course with its customary ups and downs, which is why this particular coin is used by more than 150 million users all over the world.

And, its risks do not seem to be a strong enough factor that would deter the crypto entrepreneurs from doubling their investment in the coin, and now in Bitcoin futures.

The good thing about Bitcoin futures contracts is that it allows even the startups to raise money instead of issuing shares of the company to people or borrowing from traditional investors.

Still, the bubble exists which is why companies that put in all its value in crypto assets instead of a hard currency live in constant fear of it bursting due to excessive crypto sell off.

If such a thing happens to Bitcoin, it will reduce the value of the companies and also affect all digital assets.

Such fear and apprehensions are not unusual and there are burning examples of such things happening.

One of the most significant examples is the falling of the price of Bitcoin by as much as 30% when the Chinese government imposed restrictions on the banks from holding crypto coins.

This announcement pulled down the prices of other crypto coins along with it as well which indicated a contagion in the crypto assets market.

In such situations there is nothing much for a new crypto investor to do apart from sitting back and waiting for a market correction.

The Excitement

The excitement surrounding the Bitcoin futures contracts could be seen right after its launch.

It was so much that it pushed the price of Bitcoin to all time highs with just a couple of trades on the Chicago Board of Exchange.

This is all due to the fact that the crypto investors, new and old, found these contracts to be more productive and safer.

However, good as it appeared to be for the lovers of Bitcoin, with it came some risks, which the crypto experts think could spell doom for the crypto investors as well as the coin itself in the long run.

The History

The crypto futures may be a new addition to the product list traded in the crypto market but the futures contract as such is nothing new for that matter.

In fact, if you look at the history of it you will see that the first future contract dates back to ancient times.

History reveals that a legal code was introduced in Mesopotamia way back in 1750 BC by the Babylonian king Hammurabi.

According to this code, the traders in Mesopotamia then needed to follow the stipulations as mentioned in it while trading any product at a fixed price that is agreed upon by the parties at a date sometime in the future.

The Form

The modern crypto futures contracts follow the same rule and form as it was followed by the traders in Mesopotamia in the ancient times.

In the simplest form of it, a crypto futures contract in essence is an agreement between two parties.

They agree to buy and sell a particular crypto asset, including Bitcoin, at a future date based on the price determined and agreed by them.

This trading is done irrespective of the rise or fall in the price of the coin on that particular date.

This means that the price of the futures contract can differ from the prevailing price of the underlying crypto coin in the market at the time of expiry of the contract. This current price is referred to as the spot price.

According to the agreement of the futures contract, one particular party agrees to buy a specific number of crypto coins and take delivery of the same on the specified date.

On the other hand, the other party to the contract agrees to deliver the same number of coins at the predetermined price on that particular date to the buyer, come what may, and whatever is the current market price.

The Players Involved

Typically, the players involved in the futures markets consist of the speculators and hedgers.

Both of them have different objectives of participating in the futures market.

For example, the speculators presume the risks involved in making such trades and take part in it.

More often than not, these speculators borrow quite a considerable amount of money to take part and buy the futures contracts that they bet will see a rise in price of the underlying asset in the future.

The risk involved in it is that they might lose more money than they invested in this endeavor if the market or the price of the coin moves in a direction opposite to what they predicted.

On the other hand, while taking part in the futures market the hedgers are more concerned in protecting them as well as their crypto portfolio from incurring losses due to the fall in price of the underlying asset of the contract in the future.

Therefore, the hedgers typically buy or sell their assets to lock in a specific price so that the risk of losing more money due to a drop in its value is minimized.

The Requirement

One of the most significant requirements of futures contracts is that these contracts must be traded on a well regulated, registered, and standardized derivative exchange.

It can be any exchange such as the Chicago Board of Exchange or CBOE or the Chicago Mercantile Exchange or CME and the NASDAQ.

This is what makes trading crypto futures contracts a bit more secure than trading crypto coins directly on a crypto exchange that are unregulated or free from any external control.

This encourages more and more investors to put their money into the crypto futures market.

This feature that adds to the safety of crypto futures trades has helped Bitcoin to find a place amongst mainstream finance.

Major companies such as Goldman Sachs and other household names have found these Bitcoin futures contracts to be so reliable that they have even agreed to clear these contracts on behalf of a few of their clients.

The Result

The crypto experts and market analysts believe that the Bitcoin futures contracts will cause a notable impact on the crypto market fuelling a rise in the prices of the coins.

This, they believe, will be the result of too many crypto dealers and traders wanting to hedge their portfolio and positions by making the best use of the opportunity offered by the future markets.

The Bitcoin futures contracts will also benefit the Bitcoin miners significantly. For example, these miners can use these Bitcoin futures contracts to hedge against the cost of mining the coins.

This is because they can get the money required for footing the electricity bill and mining equipment well in advance from the speculators and other players in the futures market who hope to make a profit in future through the efforts put in by the miners.

On the other side of the coin, the launch of Bitcoin futures has also influenced the performance of the regulators.

Now it will need better scrutiny from them. However, the crypto experts believe that there is a point of bother for the crypto investors here.

They think that with greater scrutiny from the regulators will come a greater risk of casting a shadow on the fate of Bitcoin in the long run.

In response to this specific fret, the trade association for the futures markets, FCA or the Futures Industry Association has shown their concern and has even warned the US regulator.

They opined that the SEC should have done enough risk evaluation on Bitcoin so that the risks to the financial stability due to it could have been minimized even further.

With such concerns from the participants trading Bitcoin futures contracts in the markets has compelled other regulators to scrutinize the market conditions more closely beforehand and take necessary actions to prohibit or allow its trading accordingly.

For example, the regulators in Hong Kong showed their concerns regarding crypto assets and have issued a formal warning.

According to their warning, only licensed firms will be allowed to offer such products to the people if they want to operate within Hong Kong without facing any legal issues.

On the other hand, the financial regulator of Korea, the Financial Services Commission, published an official decree in which any security firm that takes part in or deals with Bitcoin futures transactions will be banned from operating in that country.

The Worries

One of the most significant worries regarding the Bitcoin futures contracts is that the levels of trading and the volumes of such products are not as high as the outbreak of exhilaration it caused initially after the launch of these contracts.

In comparison, the trading volumes of other futures contracts with established currencies or commodities underlying has been much higher.

The End

It is not very clear what the Bitcoin futures contracts have in store, at least as of now.

A few crypto experts say that it will end up actually reducing the price of Bitcoin.

These crypto experts and analysts have a lot of good reasons to think so, and it basically pertains to the characteristic attributes of the Bitcoin futures contracts.

They say that there is no doubt about the fact that the Bitcoin futures contracts give the new investors an opportunity to bet against Bitcoin.

In addition to that, these contracts also allow them to settle these contracts in cash, which, in turn, boost their liquidity.

In addition to that, the Bitcoin futures contracts also allow the investors to buy or sell of the coin without actually needing to own them.

This reduces the cost of storage and saves the investors from the hassles and risks involved in owning a digital crypto wallet to hold the private keys.

All these are good since these features protect the investors and their investments from any unpredictability of the price of the underlying crypto asset in the spot market in real time.

However, all these also reduce the demand for Bitcoin which means that the price of the coin will fall further eventually.

Therefore, in the end and after considering all the above mentioned aspects carefully it can be said that the Bitcoin futures contracts have provided additional legitimacy to the product.

These contracts have also added to the security of the product since these are to be traded only on regulated futures exchanges.

However, the comparatively low level of interest shown especially by the large institutional investors is both worrying and indicative that the bubble surrounding the Bitcoin futures contracts may burst pretty soon.

History also suggests that such bubbles failed to last in the long run in spite of creating a lot of excitement in the initial stages after their launch very quickly.

For example, in February 1637 the tulip bubble burst in spite of the tulip mania created in the futures market by the Dutch for trading bulbs in 1636, just a year before.

Therefore, it can be safely said that with the introduction of Bitcoin futures contracts trading the Bitcoin bubble will be inflated even further and it will be pushed up to a point when it will eventually burst.

It is because the price is extremely volatile of these crypto assets and it can attain soaring heights and reach a world where established and usual philosophy of value is hardly applicable and effective.

Conclusion

Assuming that there is a crypto bubble created by the Bitcoin futures contracts trading in the first place, it is quite hard to say when exactly it will burst.

But it surely will due to the high volatility of the underlying crypto asset as pointed out in this article.

Dominic Mondal

I have special interest in crypto and intend to help common people to gain knowledge about the digital asset as well as its potential. Follow Me at Linkedin.