The following article is an exclusive contribution to CoinDesk’s 2017 in Review series.
On the ninth anniversary of Satoshi Nakamoto’s white book , one among the world’s most respected derivatives providers, the CME Group, announced it might launch a regulated bitcoin futures exchange .
Not to be understated, this was a pivotal moment in bitcoin’s history, and quite simply, the longer term has never been brighter.
It’s safe to mention that 2017 has been an interesting year. Almost every single metric of adoption has shown signs of exponential growth: exchange users, wallet downloads, social media chatter, Google search trends, trading volumes, transactions per day, etc.
The price has moved hand-in-hand with these metrics, and bitcoin has reached more people than ever before.
Yet, many of the prevailing trading platforms are struggling to remain online 24/7. (Even the CBOE website went down because it launched its bitcoin futures exchange .) within the majority of cases, these outages aren’t thanks to denial-of-service (DDOS) attacks, but the sheer volume of organic traffic.
And with this interest, the futures markets are effectively embedding bitcoin into the normal regulated markets, adding legitimacy for people who doubted its longevity or who still believe it’s a fraud (See: Jamie Dimon). Nevertheless, some bitcoin advocates disagree with the seal of approval from Wall Street.
Author Andreas Antonopoulos has said:
“I am uniquely allergic to the word ‘legitimacy,’ it makes me want to vomit when warmongering, war profiteering bankers use it to explain bitcoin. That takes tons of audacity.”
And it does seem there’s reason to suggest Wall Street isn’t directly behind this year’s growth.
On March 10th, the Bats BZX exchange had its bitcoin ETF application denied by the SEC thanks to the unregulated and illiquid nature of bitcoin markets. the choice marked the top of a three-year journey for investors Cameron and Tyler Winklevoss, who had long sought to bring such a product to plug .
Bitcoin has faced many regulatory challenges in its history, most at the hands of regulators: the LedgerX ETF denial, Chinese regulators halting zero-fee trading and ultimately closing all exchanges.
However, the market capitalisation of bitcoin has risen from $20 billion to overflow $300 billion within the nine months since those developments.
Fueling the hearth
That’s to not say that Wall Street isn’t bringing new interest to the market – faraway from it.
The futures markets have shown that investors want to realize exposure to bitcoin during a regulated manner without having to store the underlying asset. For the typical investor, there’s tons of risk is involved holding bitcoin and this is often represented by the many premiums.
But, apart from the pushing up the worth and generating media coverage, the futures exchange will have profound effects on bitcoin.
Increasing demand will likely cause more futures markets and creating greater volumes over time. There are currently over 15 applications pending for brand spanking new ETFs, the quantity is coming and to quote Antonopoulos again, there’s an extended thanks to go:
“When you watch a trader eat a sandwich while he presses enter on a $10 billion trade, you realize how small this game is. We are getting to have tons of volume and that’s great , actually that’s the primary step to reducing volatility.”
The 2017 Bull Run combined with scaling tension has led to a sustained increase in bitcoin volatility over 2017, breaking the five-year down trend.
The regulated futures markets and potential ETFs could also be the antidote; deepening liquidity, closing the spreads and reducing the volatility, all of which can contribute to greater market efficiency, price discovery and ultimately ensure bitcoin are going to be a far better store useful and medium of exchange.
Knowledge is Power
But no matter the tempting volatility, no sophisticated traders will jump into bitcoin without arming themselves with knowledge. It takes a time and breadth of disciplines to know bitcoin and its many intricacies – also as a touch little bit of faith.
To that end, the “education” phase is well underway, actually the CFTC (Commodities Futures Trading Commission) launched a web information portal days before the bitcoin futures launch. Its aim is to teach the general public on digital commodities.
This period of research and analysis will have many positive externalities starting from simpler regulation to greater capital allocation efficiency within the crypto economy. So far, investing within the bitcoin ecosystem has largely been haphazard. Almost every single bitcoin company has underperformed against bitcoin itself.
A greater understanding of bitcoin will foster an ecosystem that allocates capital with greater efficacy, creating the worth feedback circuit more prevalent in cryptocurrencies like ethereum.
Every healthy futures exchange needs a mix of speculators and hedgers that hold the underlying assets. Typically for markets travel by CME, this might be farmers looking to lock within the price of their harvests by short sale contracts of wheat, corn, etc.
Today, the bitcoin futures exchange is usually comprised of speculators, and there’s a scarcity of natural sellers as most traders would need to naked short (short without holding bitcoin). At Interactive Brokers, precautions are so great you would like five times the collateral to form a trade. For a contract of $100,000, a trader would wish $500,000 as margin.
To quote Richard Heart:
“The history of bitcoin is shorts getting rekt, constantly.”
Still, the power to hedge the worth of bitcoin alters the danger profile of other parts of the industry, particularly mining.
Expect more risk-averse companies to venture into mining industry. After announcing they might start mining the highest 10 cryptocurrencies Digital Power Corp. saw a stock appreciation of 750 percent. Digital Power aren’t alone and various tech companies are jumping aboard the mining bandwagon.
With the power to short sell bitcoin to “lock in” mining profits, these companies can do so with drastically reduced risk. For companies like Digital Power, instruments that provide shorting on indices are going to be invaluable. If this trend continues, Western mining corporations could start to chip away at at the currently centralized mining hash power, with 80 percent of it residing in China.
But, it’ll take time for volumes to create and spreads to shut as only a limited number of sophisticated investors are currently capable of completing the risky cash and carry arbitrage. little question that uncertainties surrounding forking, scaling and regulation will make bitcoin’s journey to an efficient market bumpy.
The most interesting a part of bitcoin’s rise to the regulated economy is that it took eight years of clamor, belief and HODLing.
To be sure, though, there’s more diligence ahead.
Still convinced it’s a bubble? CoinDesk is now accepting submissions for its 2017 in Review. Email email@example.com to pitch your idea.