How Futures Trading Changed Bitcoin Prices
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frbsf.org
People saw their friends and coworkers talking about huge gains and wanted to get in on it. Coinbase allowed anyone with a smartphone and a checking account to buy Bitcoin which further drove up the price. Meanwhile the supply was only going up incrementally. So you had a huge swell in demand and no corresponding increase in supply. This resulted in the price increase.
Then when the supply of buyers slowed down there were more sellers than buyers and the price dropped. This is the most classic form of a bubble and I'm surprised that people are looking for alternate explanations, like the introduction of futures, which I find absurd. If it were so easy to predict a crash simply because you now had a vehicle to short it, everyone would have done so. There are ways to short most securities that are traded and yet not all securities collapse in value. The author cites two examples of extreme bubbles- the subprime mortgage market and Bitcoin in late 2017- and blames the crashes on the creation of vehicles to short them. In reality the mortgage market didn't crash until people started defaulting on debt en masse and the vehicles to short the mortgages existed a long time before the market crashed.
Yes. Those bubbles happen regularly in the Bitcoin world. Maybe the futures had some impact, but even without futures a bubble will eventually end in a crash.
December was crazy. I had several non-tech friends ask me how to buy Bitcoins. I strongly recommended against buying, but at least one of them still used a leveraged trade on some sketchy platform to buy. Needless to say that it didn't take long until the volatility wiped out 100% of his investment. I'm against regulation but seeing first hand how financially illiterate people behave I'm not opposed to a minimum level of regulation - e.g., why do retail investors need access to leveraged trading?
You could ban casinos, the lottery system, as well as a number of economically necessities such as credit cards, publicly traded market systems, etc., and you STILL would be unable to protect some people from their own poor financial decisions.
So I say, as long as fraud in these markets is punished and disincentivized, there isn't much more to be done.
Everyone has a pet theory as to why bitcoin crashed: regulation, "whales" selling large volumes at once, institutional investors, Futures trading, etc.
What's the real reason? It's probably a combination, and almost certainly more complicated that solely "bitcoin futures."
- Unregulated system for whales
- already being considered a dirty currency by multiple Govs
A whale can short, influence laws and create fud. The futures market made it so people can have interest in it falling not just hope for more rising. Theres a very legitimate reason why futures market changed the dynamic
Besides, futures trading has existed a long time on chinese platforms before CME and CBOE joined the party.
It really is a waste of time to speculate why bitcoin price is going up or down on such timescale.
Maybe the futures will have some impact, but I wouldn't be surprised if in hindsight it will turn out that futures didn't have any impact at all.
Buy up a ton of Bitcoin during the lead up to futures trading, then short Bitcoin on the futures market while market selling thousands of the cheaply acquired Bitcoin on spot exchanges. You succeed in lowering the price of Bitcoin, killing the public’s perception of crypto currencies, scaring away retail investors, and you make a killing in the process.
JPMorgan has been using futures markets to manipulate Gold and Silver spot prices for years while also accumulating huge amounts.
Look at an early article that was published prior to the launch:
https://www.coindesk.com/cme-groups-leo-melamed-well-tame-bi...
It was all planned ahead of time for Wall Street to get maximum profit at the expense of regular people. What else is new.
There's a lot of greedy people that want to make BTC cost a lot more then it really should. But pay no attention to them, blame some boogieman from Wall Street for curbing their enthusiasm. If it weren't for those meddling main stream traders, we'd be going to the moon.
I am aware there are a lot of Bitcoin haters here, but i believe it is the purest form of sound money (other than perhaps gold, but that is also debatable).
It can’t be counterfeited, it is deflationary with a maximum supply of 21 million, it is very costly to produce, it is divisible to 8 decimal places, it can be stored very cheaply. The mainstream media narrative goes to extremes to try to manipulate the public’s perception and scare them away from it, but I think it’s very difficult to say what the fair market value for one Bitcoin should be. I personally think it should be much higher than what it is priced at today.
>It can’t be counterfeited,
It can be double-spent, and the integrity of the transaction ledger is dependent on no one miner controlling over 51% of the compute on the network. https://en.bitcoin.it/wiki/Irreversible_Transactions
> it is deflationary
It can not, therefore, represent an economy that expands in real value as it grows to include more people engaging in more trade.
> it is very costly to produce
The network presently costs the Earth as much energy as the entire energy usage of the country of Denmark.
https://arstechnica.com/tech-policy/2017/12/bitcoins-insane-...
And the network gets little real utility from this energy usage. A transaction can take "anywhere from 30 minutes to over 16 hours" to be recorded in the ledger.
https://coincentral.com/how-long-do-bitcoin-transfers-take/
> it is divisible to 8 decimal places
That there is a limit on the divisibility of a bitcoin makes its deflationary nature even more of a liability.
>it can be stored very cheaply.
Bitcoin has been stolen from marketplaces and web wallets with impunity. Even air-gapped storage is not invulnerable.
Well aware of this fact, but it has never happened partially because Bitcoin is the largest and most secure blockchain. Regular currencies can be double spent too, but rely on trusted intermediaries to step in and reverse the fraudulent transactions. In a way that is part of what makes Bitcoin so remarkable. That you can transact without having to depend on intermediaries.
> It can not, therefore, represent an economy that expands in real value as it grows to include more people engaging in more trade.
No, the value is in the fact that what you hold represents a piece of a limited number of coins that will ever exist. Gold does not increase in value because people are actively spending it to purchase coffee. It is a hedge against inflation.
As more US dollars enter the economy and are used for transactions, the value of a single dollar decreases.
> The network presently costs the Earth as much energy as the entire energy usage of the country of Denmark.
I am not going to defend the energy usage and say that that is good, but the energy usage is part of the reason the network is secure and why there hasn’t been a 51% attack. FWIW the traditional economy: banks, vaults, armored vehicles, money printing, etc uses up far more energy.
I would also encourage you to watch this: https://www.youtube.com/watch?v=2T0OUIW89II. Bitcoin actually has the power to introduce innovations to produce cheaper, alternative energy due to mining competition.
> A transaction can take "anywhere from 30 minutes to over 16 hours" to be recorded in the ledger.
The lightning network solves this by creating payment channels off chain which can be processed and confirmed in less than a second.
It is silly to criticize a software project for inefficiencies now that will be improved upon and changed in the future.
> That there is a limit on the divisibility of a Bitcoin makes its deflationary nature even more of a liability.
If the value of 1 satoshi (smallest divisible unit of a Bitcoin) were to get to $0.01 it would mean each Bitcoin would be worth $1 million. This problem also exists with gold, but it is even worse there. A gram of gold would cost around $40 right now, and it is not really possible to split it up much further than that.
> Bitcoin has been stolen from marketplaces and web wallets with impunity. Even air-gapped storage is not invulnerable.
Yes, but the fact that people are trying to steal it in the first place means that they think it is worth something. This is also true of any valuables. Jewelry, diamonds, gold, silver all can be stolen. Bitcoin can be stored in secure vaults or in your head.
It seems to me the inherent infinite divisibility might change this? I understand that gold is easily divisible, but couple the logistics of physical coin recalls and I see why that might affect gold and not bitcoin, which, in theory, could just double the precision of the currency with a quick commit. Need to expand the economy, there you go.
Perhaps the argument here would be that in a cash-less economy, where all funds are issued digitally by a government, this could also happen?
No, because 100 cents are not worth more than 1 dollar. Increasing divisibility just means you can split existing value into more pieces, it doesn't change the overall amount of value.
They have provided exactly zero evidence that they indeed have 2+ billion USD sitting in some bank account somewhere. I think they even stopped pretending that they will pass an audit.
I will eat my shoe if they are not breaking their own promise, about tether being backed by USD.
Do you have anything at all to back up this flailing conspiracy theory? Or are you just Roseanne'ing for an audience of true believers?
https://medium.com/@super.crypto1/4th-dimension-bitcoin-mani...
There are also documented case studies of banks paying to fund studies designed to harm crypto currencies or produce content. For example: https://www.cnbc.com/2018/02/22/poland-central-bank-paid-you...
A lot of the FUD attacks in the media have also been fake in order to create panic selling. For example: http://m.scmp.com/business/article/2132379/us-news-groups-ta...
There are also clear coordinated attacks from CNBC such as a couple weeks ago when Warren Buffet, Charlie Munger, and Bill Gates all got together to trash Bitcoin.
These are carefully timed and executed attacks.
> As many people are reading this, I would like to remind all — Please take this as an opinion only
I'm going to go ahead and not even bother dismissing that one.
The CNBC article. You applied a Fox News worthy amount of spin to what really happened.
The central bank of Poland decided to warn its citizens against the dangers of speculating in cryptocurrencies. The SEC has done the same. The former simply adopted a more creative approach targeted at a high risk population: millenials. Crypto is rampant with fraud. This isn't news.
I'm not even sure why you linked the scmp article. From there:
> The bogus invitation could be a ruse by traders seeking to profit from a further decline in cryptocurrencies including bitcoin on the futures market, analysts said.
Enough said.
> There are also clear coordinated attacks from CNBC such as a couple weeks ago when Warren Buffet, Charlie Munger, and Bill Gates all got together to trash Bitcoin.
They're all close friends/business partners and have been for a very long time. It's neither surprising that they concur nor that their opinions were sought within roughly the same timeframe. Buffett and Gates are the two most publicly generous contributors to charitable and philanthropic causes around the world. You decided to call into question the motives of perhaps the two wealthy individuals on this planet who are least likely to have malicious intent, based on the evidence.
As far as I can tell, you're the real shill. Weaponizing a combination of FUD and conspiracy theories to do whatever you can to resuscitate the value of your ill-advised crypto holdings. I can't fault you for being human I guess.
I somewhat disagree about Bill Gates and Warren Buffet’s intentions though. I believe strongly that wealthy individuals and banks and governments are very scared about the threat that crypto currencies pose to their wealth. The more money that moves into crypto currencies from the traditional financial system the more they have to lose. Also some of the quotes they are throwing around are not those found in a well educated debate, but rather childish, playground insults:
“Probably rat poison squared” – Warren Buffet
“A rare technology that has caused deaths in a fairly direct way” – Bill Gates
“Worthless, artificial gold” – Charlie Munger
“A scum-ball activity.” – Charlie Munger
“It’s just dementia. It’s like somebody else is trading turds and you decide I can’t be left out.” – Charlie Munger
Nearly as bad as trading “freshly harvested baby brains” – Charlie Munger
If they really did not feel threatened by Bitcoin or think there was something there, they would keep their mouths shut.
And have you entertained the possibility that they're right and you're wrong? Or would that be heresy according to the canon of crypto jihadism?
https://www.reddit.com/r/IAmA/comments/80ow6w/im_bill_gates_...
People are betting against Bitcoin because it's a stupid idea. It just plain doesn't work, so it's not a threat to anything except the atmosphere and Bitconnect victims. If anything, "the establishment" should be grateful for Bitcoin because it shows how much we depend on institutions like the SEC, the FDIC, and the Federal Reserve.
How do you then explain the sudden ability for a much wider array of people to subvert drug prohibition?
This is a frequently made logic mistake. Proof of work determines the value of the currency strongly because it is inherently interconnected with the sustainability of the underlying network operation. That is why it is often explained as "the ledger is the currency".
Mining is not only for creating new coins but also for validating transactions and propagating of the ledger.
Therefore cryptocurrency is a different paradigm where direct comparisons are not always possible and result in wrong conclusions.
In Bitcoin, and other PoW blockchains, the protocol dynamically adjusts the difficulty of mining a new block such that it requires more work if there are more miners. Which also means that it requires less work if there are fewer miners, which is why it was easy to mine Bitcoin on a laptop in the early days but now it requires specialized hardware.
The causality path works like this: Price of the coin goes up -> it becomes more profitable to mine -> more miners jump in -> difficulty goes up -> cost of mining increases. This continues until there is an equilibrium.
In the case of cryptocurrency everyone is entitled and able to produce it. So there is direct competition and open market for creating "coins".
Would you pay $7300 for a bitcoin if you can produce it yourself for $1? Or why would not someone sell it for $5? At the moment, the price for producing a bitcoin is very close to the market or exchange value.
How does that figure given timeframe? Are you somehow calculating equipment initial cost and electricity in an estimate? Over how long?
Hashrate follows price only. Very rarely will the hashrate effect price
Miners have no say in what is a valid transaction. Mining system had only one purpose. To make sure miners have no say on what is a valid transaction
Miners have no control over how new coins are made. They disempower themselves by competing for the protocol dictacted reward
Miners collect the transactions on the network into large bundles called blocks. These blocks are strung together into one continuous, authoritative record called the block chain.
Miners create blocks of transactions, and they have to create them in such a way that the rest of the network will accept them. One of the requirements is that the transactions in the block are all valid transactions. So yes, miners will validate transactions before they add the transaction to a block. If the miner cheats, and puts an invalid transaction into a block, then the rest of the network will reject that block, and the miner would have wasted their time doing the proof of work on that block.
https://bitcoin.stackexchange.com/questions/148/what-exactly...
The protocol decides what is a valid transaction and the users enforce it.
If miners decide what is valid the price of bitcoin goes to zero. They are a slaves to the protocol and that is the only reason that the mining mechanism works. Miners disempower themselves by competing
Yes their volume is tiny compared to the unregualted market I can hardly think it’ll have any effects.
Reallly?
Consider this.... If no one can short something then all you can do is ignore or like it. In that case it only takes one investor to make the price go up.
With shorting you get a much more accurate view of what people value something at as you can bet on the downside.
More importantly it allows for arbitrage, which is the very market force that keeps our prices accurate.
Shorting doesn't mean prices will always go down, you could have shorted China to disastrous results in the past 4 years but it does cause a dampening effect in prices.
Or maybe a more direct example, if shorting doesn't have any effect on prices decreasing then why do many markets have a short sale rule?
If shorting doesn't have a connection to prices going down, why did the US prevent shorting of financial stocks during 2008?
Weak for what it tries to support, in any case. You still have to explain how things went up so much when it was known futures were about to start trading, and why it would go down so much right after. Why would people be buying it like crazy if it was a generally known thing that when something becomes shortable, it goes down?
Maybe look at the introduction of other exchange traded futures rather than an OTC market.
Long term it matters whether things can be shorted, of course. But they're trying to say a very specific turn in the market was caused by this. And like the other poster says, it's not even true that it wasn't shortable.
http://www.cmegroup.com/trading/weather/temperature/us-month...
If a future is cash settled it doesn’t exert pressure on the underlying. No matter how many weather contracts you trade you can’t change the weather.
For example, they could sell a promise to deliver a bitcoin in a month’s time at a lower price than the current spot price and hope to buy a bitcoin during the month at an even lower price to make a profit.
All BTC futures contracts are cash settled, there is no underlying asset being exchanged.
It matters very much how it is settled. Right now BTC drives the price of the future, but there isn't a mechanism for the price of the future to pressure the price of BTC.
The CME contract on bitcoin futures DOES NOT EXERT DOWNWARD PRESSURE on the spot price. Bitcoin futures are cash settled in dollars. "Bitcoin futures are financially-settled and therefore do not involve the exchange of bitcoin." [http://www.cmegroup.com/education/bitcoin/cme-bitcoin-future...] . Therefore when you buy a bitcoin future you exert as much pressure as betting on the NBA finals affect the outcome. There is a perhaps a media effect, but that is of second or third order.
If one were able short bitcoin, or one had to deliver or receive bitcoin on tract expiry, that would create downward pressure.
Similarly the authors contention that it was the growth of asset backed CDS which brought an end to the housing market bubble is simply not true either. ABCDS had been traded in volume for a long time before the crisis. The proximate cause was (as it almost always is) credit and leverage. When the liquidity dried up, the prices came crashing down.
Scenario 1: The spot market price of Bitcoin is $10000. The futures market for 5-day-out Bitcoin is $7000.
Should this investor: (a) Buy one actual bitcoin; or (b) buy 1.4 cash-settled 5-day out bitcoins, and then as soon as the market settles, take the settlement cash and buy bitcoin at the same settlement price (which will net approximately 1.4 bitcoin)?
The answer is obvious. In this case, the reduced futures market price has caused an investor to not buy from the spot market -- which has a negative effect on the spot market price relative to had the futures market not existed (in which case the investor would have had to buy BTC itself).
Senario 2: Spot bitcoin price is $10000, 5 day out futures price is $14000. Again, where should the bitcoin-wanting investor put their money? The spot market, obviously.
(Scenario 1 also creates an incentive for current BTC holders to sell their bitcoin for cash, and buy 5-day-out bitcoin on the futures market instead, and pocket the difference. If you hold 1 BTC, you can turn it into 1.4 BTC in 5 days -- most rational investors would take that bet. Which directly decreases the spot market price by creating more demand to sell BTC.)