Bitcoin: That’s the Thing That Goes Up, Right?

Not so much a price prediction, more a market structure view, but Colin Lambert believes the nature of trading in Bitcoin will change in 2018.

If you ever wanted to know the financial markets’ equivalent of playing Russian Roulette, look no further than attempts to predict the price of bitcoin going forward.

There were not many who saw a decline in bitcoin at the start of last year, but even though there was a consensus that it was going up (and why wouldn’t it when you have a limited supply trying to meeting increased demand driven by publicity?), no one remotely nailed the year-end of $16,000. the highest estimate of the price this time last year was probably around $2,000 – and even during the third quarter of the year when it rose past $4,500 no one was thinking a further quadrupling.

But quadruple it did from there, accompanied by all sorts of conspiracy theories and rumours (which are the lifeblood of a financial market after all) before, in December, it ran the risk of going mainstream when not one, but two Chicago exchange groups launched bitcoin futures.

It is interesting that writing this a few weeks after launch, the price of bitcoin futures is hovering around the $15,000 mark – pretty much where it launched on Cboe and well below the $19,000 that CME contracts settled at after an initial spurt above $20,000.

So, in the three weeks since two regulated exchanges joined the bitcoin fray, the market price hasn’t actually moved (actually it has, it has bounced around as usual, but with tighter ranges than previously – which isn’t hard), and may signal the days of easy profits are over. Put simply, what some expected to happenis underway – a more transparent, exchange-traded structure is taking some of the heat out of bitcoin.

For this to continue of course, trading activity on CME and Cboe needs to maintain reasonable levels so that people can see the contracts as a good expression of the value of bitcoin. If trading dwindles – and volumes have dropped since launch – then the value of bitcoin could be back in the hands of the dark world where it is traded on various exchanges at very different prices. If that happens, the emotional rollercoaster that was bitcoin in 2017 will continue apace.

There are reasons to think it will not, however, for even though the CFTC in the US is investigating the appropriateness of self-certification when it comes to bitcoin futures, it is likely that other countries will see a degree of stability and oversight from the US experience, and encourage their own doemestic exchanges to launch futures products.

It is hard to see bitcoin continuing its stellar rise without the regulators getting more involved – it will only need one of its characteristic 20% drops while wiping out a few retail investors for this to happen – and the easiest way for them to do so is through futures. This route enables various authorities to allow bitcoin trading to continue, but in a more rational and open environment – a desire that may be expressed in greater rules around existing bitcoin trading venues to the extent that anyone trading on unauthorised or unregulated venues will get no sympathy if the venue is hacked, crooked, or they lose all their money.

Something is likely to be done, not least in a country like South Korea where bitcoin this year has traded typically some $4,000 above the price anywhere else in the world. There is demand in the country which is driving this basis blowout, but the authorities are clearly worried about it and they have a very well capitalised and functioning futures market.

Another aspect of bitcoin world that could change this year, helped again in part by a shift to more futures trading, is that, while bitcoin is the headline act in the cryptocurrency show, is it really a currency? More authorities seem to be coming to the conclusion that it is not and the experience of many would-be users who find transaction fees around the $30 mark just for using it to buy a coffee or other small items are likely to agree.

If bitcoin is not a currency, then it has to be classed as a commodity – something that again lends itself to futures exchanges steeped in that asset class throughout their history.

Of course, one cannot write about bitcoin without a price prediction, so here’s one: While it is tempting to say it may well end the year roughly where it started (it will not be a smooth ride in any shape or form of course), the likelhood has to be it will end lower. Not at zero, but certainly in the single digits of thousands of dollars. The reason? As one crypto trader recently told Profit & Loss, “Why am I going to risk it all on bitcoin, which has had its run, when I can get into other cryptos at ground level?”

Galen Stops

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