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.
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".
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.
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.
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.
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.
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.