Cryptocurrency futures contracts are likely to spell trouble for Bitcoin and altcoins. However, they are likely to keep the cryptocurrencies from reaching their true purported market value. Since it happens in the precious metals markets, says Ian Bezek, an associate analyst for Value Investor’s Edge who previously worked for Kerrisdale, a New York activist hedge fund.
Many people see futures contracts as a good thing that will boost prices and stabilize markets and help many institutional investors to take the plunge. He is less optimistic about these futures and says rising of prices does not necessarily mean that value is going up. However, he agrees that futures will reduce volatility like witnessed in gold and silver markets.
“Gold and silver prices would probably be higher, and they’d certainly be more volatile if it weren’t easy for hedge funds. The other large money managers to short gold and silver with reputable counterparties in vast quantities at minimal cost.”
Back to problems he thinks will occur or are occurring, he says that for now, Bitcoin supply is limited since many people who truly believe in Bitcoin own a ton of the float and are not willing to sell. Futures market will make available a larger working float and make it hard to maintain an elevated price, he says.
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Shorting Bitcoin, for now, involves working with sketchy exchanges and while this is good for retail speculators. Large credible money managers would not want to do it. He cites an example that only a few hedge funds were victims of the huge Mt. Gox hack.
According to him, putting Bitcoin futures in a “regulated exchange with airtight counterparties”. It will make it a field day for short sellers. Market inefficiencies exist today as many people pay more for Bitcoin through the Bitcoin Investment Trust. GBTC, he says, has appreciated less than 40% compared to a doubling in its NAV in the last three months of his warning about it.
“Put Bitcoin futures on a regulated exchange with airtight counterparties, however, and it will be a field day for short sellers. You can see the ongoing inefficiency in the market today since people are still paying a more than 30% premium to buy Bitcoin via the pink-sheet listed Bitcoin Investment Trust (OTCQX: GBTC) as opposed to just buying coins on the open market.
It is possible that there will be futures options in the coming days. Since that move will allow people to buy options on Bitcoin according to him. This will set the stage for massive profits if Bitcoin crashes and limiting losses if it continues to rally further.
“The addition of options, however, entirely changes the calculus. And remember, market makers tend to offset short positions opened via options by short selling the underlying futures contract”.
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Bitcoin optimism is reaching euphoric levels according to him and further problems exist in the market today. However, new competing currencies are launching almost every day, not mentioning the many (1,022 coins) listed on CoinMarketCap. Bitcoin also appears to be forked at least once a quarter.
He says that it is possible the 1999 stock market crash could also occur due to the current blockchain fever.
“Wherever prices start rising quickly, a significant subset of the population will turn it into a get rich scheme.”