Consideration of Bitcoin Futures

There is money in those digits! The growth and scale of bitcoin has really attracted the attention of the financial sector and we are on the verge of a new epoch in bitcoin with the futures trading. What will the new epoch be?

One thing is clear, it will be surprising. Let’s explore.

The motivation for this change could be a combination of greed via fees on trading, enabling easier institutional access to bitcoin exposure, allowing short positions or attempts to control bitcoin pricing.

The futures market and the real bitcoin market are very different:
• Buyers: Individuals vs institutions,
• Market culture: HODL vs ‘managed’,
• The instruments themselves: actual bitcoin vs futures,
• Operating times: all the time vs office hours,
• Supply: Strictly limited vs unlimited,
• Freedom: Anonymity vs US government controlled identity management
• Geography: global vs US centric
These imply that even with a futures market having much higher volume, it would still be more reactive to than determinant of pricing.
Furthermore, the ease (albeit with required technical competency) and low cost of bitcoin acquisition and storage reduces one of the benefits of financialisation. With futures settlement assume to be in USD this means that the bitcoin market will still have a degree of independence to determine its own pricing rather than following the futures determined pricing even with potentially infinite supply of futures contracts.

In some cases, buyers move to trading futures away from the underlying market. Current bitcoin buyers and traders seem unlikely to shift en masse from anonymously owning the underlying assets. This means that the futures market is an additional market that facilitates the addition of new demand from the buyers who have not been able to participate previously.

The combination of these imply that the future’s market will actually be following the real market or provide a boost to the price. Probably, decreases in the futures price will result in short run buying opportunities in the real bitcoin markets with many buyers hunkering down for more HODL.

The price increase seems more probable, however it may be so significant to potentially cause other issues. A burn-up where the bitcoin pricing climbs even more drastically to become so high to be irrelevant for most individuals trading in the real market. This could result in a change to buyer behaviour and cause a bubble pop when the price greatly exceeds the underlying Bitcoin popularity. As seen many times, a rapidly increasing bitcoin, as the dominant crypto currency, sucks the money and energy from the other crypto assets, stifling the innovative growth in the rest of the space. Additionally, an already volatile market would be even more volatile scaring off some participants.

The bitcoin futures could result in real impacts through excessive pricing and volatility in the short and medium term. Thereafter Bitcoin will likely be retained in strong hands and shorting opportunities will be few.