What is bitcoin worth? Where is its price heading? These questions are the center of many debates featuring economists, investors, enthusiasts and other “experts.” And now, bitcoin futures are adding a new level of complexity to the conversation.
Introduced in December 2017 by the Chicago Board Options Exchange (CBOE), the much-hyped futures contracts allowed institutional and retail investors an opportunity to make bets on bitcoin in an entirely new way. As the driving factor behind the price of gold, oil and other commodities, these contracts gave bitcoin a level of legitimacy in the eyes of otherwise uninterested parties.
The move sparked the largest futures market in the world, the Chicago Mercantile Exchange (CME), to follow suit.
Many hailed the new investment opportunity as a positive move for bitcoin, with some even suggesting it would cause a new wave of interest in the cryptocurrency, potentially even sending its price soaring well beyond its run-up to $18,000. But what actually happened left many scratching their head.
Economist Yukio Noguchi argues that the new futures market had a direct impact on prices. Though his claim is based on little more than coincidence, the report was widely covered by major publications in the space, featuring the quote: “Because it’s now possible to trade on bitcoin futures, you’ll never see a rapid surge again.”
In the crypto-space, it’s almost a faux pas to suggest that a price decline is justifiable without some sort of bad actor being involved. From Jamie Dimon’s dismissal of bitcoin to the Mt. Gox whale dumping, media outlets scramble to peg price movements to something.
While some of these price movements may have a story behind them, the reality is that bitcoin is a brand-new idea and its value is going to fluctuate with dramatic climbs and falls without any ‘real’ reasons behind the moves.
Currently, futures contracts make up a tiny fraction of the total market.
Though a point of controversy in many markets, the role of futures contracts is to reduce volatility and allow traders to utilize a highly liquid investment vehicle. Traders are able to take ‘long’ or ‘short’ positions, making bets on the future prices of different commodities. In turn, these bets allow investors a means of hedging against drastic price movements and finding a fair price for their commodity.
While futures contracts could effectively help hedge against rising or falling bitcoin prices, there is another player in the game: the speculator.
Speculators aren’t looking to reduce risk or volatility. In fact, they may actively encourage it through risky bets. This is where big money can actually move markets for the worse. Either through pumping the price of the commodity or shorting it, essentially betting that it will lose value.
Though speculators pose a larger problem in small markets, they are still a necessary force in determining the true value of a commodity. The closer a contract gets to expiration, the smaller the spreads become and the more information a market has to realize a ‘truer’ price for that commodity.
There’s wild predictions heading in every direction. Some say to $1,000,000, others say to $0, but no one really knows. With as much hype there is around the price, the one thing that will finally make it acceptable in the mainstream is a reduction in volatility.
By now, most can agree that bitcoin will do both: Rse and fall. With futures contracts, investors and spenders alike can at least mitigate their losses if they play their cards right.