BitcoinInvestingNews Analysis

$10K Bitcoin Is Just The Tip Of The Iceberg

By December 2, 2017 No Comments
individual investors opening wallets on coinbase and other providers have decided to jump into the cryptocurrency space themselves by taking matters into their own hands, but they merely represent the tip of a massive iceberg.

think bitcoin $10,000 was big? it's the mere tip of a massive iceberg. The chicago mercantile exchange's futures contract, set to debut on December 18th, will connect every currency trader on earth to the bitcoin market as easily as they access the dollar, euro, or yen.  Literally overnight, bitcoin will become a player in the $5 trillion-a-day global currency market.

Not Your Typical Market

Bubble-talkers are always pointing to bitcoin's skyrocketing price, but fans are right to remind them that with a market capitalization of $200 billion, bitcoin is still only a tiny fraction of the world's $200 trillion worth of traditional financial market assets.

Bitcoin is about to take a deep dive into that $200 trillion pool, changing everything.  This is not your typical market created by professional traders and later opened to amateur investors.  Instead it's the polar opposite - a market created by the little guy.  Now the big boys are about to arrive at the party.

Like Grandma Rollin' Up On a Harley

The Chicago Mercantile Exchange (known to traders as "the Merc") is the world's largest futures exchange, trading 20 million contracts daily.  Originally founded as an agricultural commodities exchange in 1898 as the Chicago Butter and Egg Board, it still trades cattle, hogs, milk, cheese, and butter. 

Kinda like Grandma rollin' up on a Harley, on December 18th you'll be able to trade - you guessed it - bitcoin futures, at the old butter and egg board.  

Individual investors, like my barber and my mail carrier, are literally tripping over themselves to open coinbase wallets, with new user growth accelerating to 50,000 new wallets a day - that's about 1.5 million per month!

Individual investors, like my barber and my mail carrier, are literally tripping over themselves to open coinbase wallets - 300,000 new accounts during thanksgiving weekend.  so instead of the typical market created by professional traders and later opened to amateur investors, bitcoin is a market created entirely by the little guy, with the big boys arriving late to the party.

Unlike Any Other

Commodities Futures Trading Commission Chairman J. Christopher Giancarlo called bitcoin "a commodity unlike any the Commission has dealt with in the past". 

You can say that again.  Never has the market for an entire asset class been created completely by amateurs, with the big boys being the last to arrive at the party.

Futures Myth-Busting

There are two common misleading myths circulating about futures: one is that traders will be able to easily drive the price of bitcoin down, and the other is that bitcoin futures, since they are cash-settled, are not likely to have much impact on bitcoin trading volume and liquidity.

A look at the basics of futures trading reveals that both of these myths are false.  Futures trading will not only increase trading volume and liquidity dramatically, but it is also much more likely to exert upward pressure on prices.

Individual investors will no longer have to overcome the fear of a weird, scary new market.  Combine this fact with institutional deep pockets and you get a tsunami of cash headed for the cryptocurrency market.

connecting every currency trader at the world's largest exchange will bring a tsunami of cash and make bitcoin a player in the $5-trillion-a-day global currency market

How It All Works

The CME futures contract size will be 5 bitcoins, with margin of 35%.  It will be cash-settled at the Bitcoin Reference Rate, a volume-weighted average of trades on 4 exchanges (Bitstamp, GDAX, ItBit and Kraken).

Cash settlement will mean that no actual bitcoin will change hands.  Contracts will be settled each day in US dollars at the BRR.  But don't get it twisted - this doesn't mean that BTC volume won't be affected.  As a matter of fact the impact on volume is likely to be huge, and weighted mostly to the upside.

The reason is simple: any trader not holding bitcoin who wishes to offset, hedge, or arbitrage a position will find much more liquidity in the spot market (actual bitcoins traded 24/7 on global exchanges) on the buy-side than the sell-side.  In this case the sell side would be short-selling bitcoin, and doing so with high liquidity at a price that closely approximates the BRR.  At least for now, that would take a herculean effort, and the trading slippage alone will take a huge chunk out of profits. 

The bitcoin market went wild and blew past $6600 when the Chicago Mercantile Exchange announced plans for a bitcoin futures contract. But what does that mean? We break it down for you.

could traders conspire to drive the price of bitcoin down?  only temporarily and at a significant cost, as buy-side liquidity in the spot market will allow arbitrageurs to quickly correct any mismatch of futures trading cheap to fair value.

Conspiracy Theories

What about a conspiracy to short bitcoin prices down to zero?  Or the fear that traders holding bitcoin will sell in droves and replace their holdings with long futures contracts?

Both of these scenarios are way overblown and any effect on the market is likely to be muted and temporary.

Shorting bitcoin just to prove a point is a sure money-loser, and a fast one.  Arbitrage in the spot market would work to rapidly correct any mismatch of futures trading cheap to fair value.

Trading volume on the global currency exchange forex is more than $5 trillion a day.  bitcoin has 10x'd its trading volume this year to $628 million daily, but is still minuscule compared to forex.

Trading volume on the global currency exchange forex is more than $5 trillion a day. bitcoin has more than 30x'd its trading volume this year to $2 billion daily, but that number is still infinitesimally tiny compared to forex.

Unenviable Position

Even if downward pressure in the spot market were to cause the price to drop significantly, any long futures contracts that replaced bitcoin holdings will come due, leaving the hapless trader in the unenviable position of having to trade out of his position at a price near the BRR when the contracts expire - not an easy task - and one that could have the net effect of driving the price even higher.

Bottom Line

A tsunami of cash is heading for the bitcoin market - cash that is much more likely to exert upward pressure on prices than downward pressure.  Literally overnight, every currency trader on earth will be connected to the bitcoin market.

2017 will be the year that bitcoin went mainstream - emerging from the shadows of the dark web to become a player in world financial markets.  Looking back, bitcoin $10,000 will look tiny, like the mere tip of a massive iceberg.

Bubble-bla-bla loves to focus on bitcoin's skyrocketing price, but fans rightly point out that with a market cap of $200 billion, it's only a tiny fraction of the world's traditional financial market assets. Bitcoin is about to jump into that $200 Trillion pool with futures contracts to begin trading at The Chicago Mercantile Exchange and Nasdaq.

Bubble-bla-bla loves to focus on bitcoin's skyrocketing price, but fans rightly point out that with a market cap of $200 billion, it's only a tiny fraction of the world's traditional financial market assets. Bitcoin is about to jump into that $200 Trillion pool with futures contracts to begin trading at The Chicago Mercantile Exchange and Nasdaq.

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