Can The CME Futures Crush The Cryptocurrency Market?

by CryptoCheets — on

In anticipation of the release of the first bitcoin futures (XBT) last Sunday, the price of the virtual currency rose to a high of $19 000, or a 413% increase since the announcement of the futures launch. However, various details are pointing to the fact that the latest price surge might have severe implications on the stability of the digital currency, in the days and weeks to come. On top of this, numerous indicators are raising the community's eyebrows as to the legitimacy of the price increase. But why?

Who Benefits From a Highly Priced Bitcoin?

At first, bitcoin reached the $10 000 milestone on high trading volume, followed by an expected sell-off and profit taking at the levels mentioned above. However, the cryptocurrency kept rising at a diminishing volume (negative volume oscillator), only increasing during times of sell-off. Usually, this is a sign that some big player, or players, are discreetly stacking up on coins, while there is no more fuel to keep the price going up. But who would be audacious enough to keep buying such significant amounts at such high levels? Either someone who has unique information that would guarantee him a price increase or someone who would benefit from crashing the market by liquidating massive amounts and shorting futures.

Moreover, the 'masses' entering cryptocurrency would probably not have enough power to influence a $110B increase in the market price in just over a week. The reason for this is that they are investing proportionally lower amounts (cash to coins). If a year ago, for example, you could buy 1BTC for $1000, today you can only acquire 1/16th of it. In result, this creates an inverted pyramid where the earlier adopters hold the majority of the coins. However, the new ones are fuelling the enormous price increase, but only by acquiring minimal amounts (lower overall proportions). Obviously, this cannot go on forever, and at some point, there will be a lack of people willing to buy significant enough quantities of cryptocurrency to keep maintaining the prices at such high levels.

In other words, this is creating a very favourable scenario for any individual, or institution, interested in shorting the bitcoin futures. In that case, they could simply have accumulated enough coins (a long time ago, or since the futures announcement) to sell at lower values and influence the direction of the price at their will. If you think this is impossible, then you have not been into cryptocurrency long enough. Thus, this creates the perfect sandbox for anyone having the means to crash the bitcoin price. Be it bitcoin whales or Wall Street.

Wall Street Believes Bitcoin Is Very Overvalued

In addition to this, 96% of Wall Street economists believe that bitcoin is in a highly overvalued, according to a survey conducted by the Wall Street Journal. In this case, the popular opinion of Wall Street traders should not differ too much from the economists. But if Wall Street is sure that bitcoin is in a bubble, would they long or short bitcoin futures? The answer depends on the length of the future contract. If Cboe's futures are one month old, CME's are three times longer by nature. Now, if Wall Street is so sure that bitcoin is in a bubble and going to crash, what motivation would they have to long a three month long future contract? None, because the market is too unstable for their risk tolerance. The risk of shorting the market is therefore higher. It would not be an understatement either so say that they also have the tools to crash the real bitcoin market to their advantage. After all, we are talking about Wall Street.

Similarly, what hedge fund manager would long 3-month futures contracts for a commodity that has risen 1700% in a year and 413% in the last three months? None in his right mind. But what would prevent this manager, or a bitcoin whale, to short the contracts, sell a massive amount of bitcoin, thus dropping the price, and capitalising on this? Imagine how profitable this can be for the firm in question, their clients and their reputation. This is without mentioning the hundreds of ‘bitcoin whales’ that probably know each other since the early days. The consequences can be severe.

All in all, the increase in price based on a negative volume oscillator and the arrival of the futures market makes it a perfect scenario for anyone having an influence on bitcoin to try and manipulate it. The influx of new users does not help the situation either as the quantities being bought are not significant enough to sustain a half-a-trillion-dollar market, with no functionality yet. While blockchain has a very bright future, the market seems to be in an irrational spot right now. And even if we, holders and traders do not want it to have a correction, it is unhealthy to assume that eventually it will not happen (economics is not a pseudoscience). The only question remaining is: when and why? In this case, all the pieces of the puzzle seem to fit together.

Follow us on Facebook and Twitter

Write for Us

Get the Cryptocurrency CheatBook for FREE