Excited for CME! Yet, Cautious...

in bitcoin •  last year

Hello again!

I'm sure you've all heard about CME Group planning to come to market soon, and I know I am very excited for the market exposure and legitimacy they will bring to the Bitcoin universe. I think there is a very good chance that the price of bitcoin will continue to grow rapidly. If CME hits the right dominoes, we might continue to see exponential growth the same or better than 2017!

However, during this time of exuberant optimism, I am going to have to be the wet blanket who reminds myself and everyone that this is not a sure thing.

Remember, when CME announced their futures contract, the price of Bitcoin was $6000. Since that moment, we have seen the price of the coin easily reach every sell target mentioned by the big forecasters, usually earlier than they forecast. Maybe this means that there is going to be a new, much higher floor for the price of BTC, and CME's announcement rendered the asset extremely undervalued, and so the breakneck speed is just to catch up to its true value before the futures contracts hit.

Or, maybe this means that that is a lot of speculation about how much new demand CME is going to bring, and there is a big potential for collapse if that demand doesn't materialize in December. Remember, because big institutional investors are not involved quite yet, there is still huge potential for bitcoin to be manipulated. Here are the stats on bitcoin's distribution:


Point is, a small number of investors hold a very large proportion of bitcoin. Not nearly as bad as, say litecoin, but definitely a very small group. Here is why I will have my finger on the sell trigger during CME's debut:

Somebody who is currently holding billions of dollars worth of bitcoin could make a lot of money by HODLing and hoping for prices to continue to rise exponentially. However, they could make also make a lot, and more predictably, through careful manipulation and timing. Here's how: first, they hear of CME's plans to start futures contracts. In fact, they might have been personally involved in convincing CME Group to start offering them.

Next, they buy as much as they can before and immediately after the announcement, and fuel speculation about the upcoming price explosion. As that speculation turns into more gains, they offer yet further price support for the coin. The goal is to get everyone into a bull mood by the time CME hits, with all of them thinking "It rose this much before CME even came on the scene, imagine how much it will continue!"

Then the futures start trading. Bullish sentiment is strong, so contracts at first trade very high. Our manipulator sells a lot of future bitcoins above $10,000 per coin (remember, futures contracts let a seller push the price UP while they dump future coins. Crazy, right?). Then, once they've built up a huge short position, when the market stalls its upward trudge, they begin a massive dump of their BTC holdings. Billions are liquidated in a matter of minutes. Prices suffer a major blow across every major exchange. Optimism is shaken to its core, and a reversal begins. As prices begin to fall, all of the momentum traders jump off the wagon. Stop loss orders start getting triggered in a cascade of mechanical selling, triggering system wide panic. Prices crash far below $6000 as trust is shattered and major institutions decide, once again, that Bitcoin is too wild for them. And our manipulator delivers coins for $10,000 a piece, plus a premium for locking in a "low" future price, and walks away with billions in their pocket to invest in the next coin -- one untained by Bitcoin's Mt. Gox and CME Group disasters...

Again, I'm very optimistic about Bitcoin's price rising. But, I'm not taking out another mortgage to buy more coins, because this could still go very badly for us HODLers. Don't just enjoy the ride. Stay alert and don't get caught with your pants down! When the crash comes, I hope you've got your stop-loss orders in the right place!

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