I am writing this article on Sunday evening after Bitcoin futures have been trading for a few hours in the Cboe Global Markets, Inc exchange. My guess, is that, by the time you read it, you might be already bombarded with news about the first of trading of Bitcoin futures so I am going to try to stay away from stating the obvious and instead focus on expressing a few thoughts about my impressions from yesterday.
In the past, I’ve regularly written about the implications of future contracts in the “future” of Bitcoin so its good to finally see some of those ideas implemented. Yesterday, may transcend in history as a pivotal day in the evolution of Bitcoin and its integration into the broader financial; markets. Kudos to Cboe and CME for taking the charge implementing future contracts for Bitcoin and staking their reputation on the future of digital currencies.
A Successful First Day
As of the time of writing this article, future contracts were trading around the $17,000.00 mark with the cash equivalent oscillating between $16,000.00 to $16,700.00. Overall, this can be considered an impressive performance particularly if we factor in the considerable volume or orders placed and the fact that may skeptics were predicting disaster for the first day of action. The significant volume of order caused the exchange to halt trading for a while which can be a lesson for new venues such as Nasdaq that are planning to enable Bitcoin futures in the next few months. The volume also reveals that the demand for Bitcoin futures has expanded beyond traditional institutional investors reaching mainstream audiences.
The launch of future contracts has long been seen as the biggest validation for Bitcoin and the main factor behind the recent rally on the price of the crypto asset. However, as we witnessed yesterday, futures may help to control or even diminish the price of Bitcoin. This is due to the fact that the new contracts offer a vehicle for skeptics of digital currencies, from which there are many among institutional investors, to short Bitcoin. Contrary to popular thinking, futures might introduce enough friction in the long term between bears and bulls to help stabilize the price of Bitcoin.
Gold Trading Declines Sharply
While Bitcoin trading has been off the charts, gold markets have been experiencing an unprecedented calm. In fact, the gap between the upper and lower end of gold future contracts has been at its lowest level since October 2005. Bitcoin pioneers such as the Winklevos brothers have been very vocal positioning Bitcoin as an alternative to gold. The recent raise of popularity of Bitcoin can be definitely be considered one of the main facts behind the decline on the demand for gold.
A Risky Formula: Derivatives Over Unregulated Assets
Recently, I wrote about the risk that derivatives built on top of cryptocoins can represent for the stability of the digital currency ecosystem. Derivatives such as future contracts are simply statistical predictions built on top of financial assets such as commodities or even other derivatives. The asset in this case(Bitcoin) turns out to be incredibly volatile and very sensitive to market manipulations. That combination of mathematical speculative models on top of volatile financial assets is definitely a risky proposition despite the regulatory framework that comes with future contracts. The potential reward for the successful implementation of Bitcoin futures is huge but the risk is relevant enough that regulators should keep an eye on it.