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Bitcoin Futures: Risks and Incongruities

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Amidst the excitement over the launch of CBOE and CME bitcoin futures on December 10 and 18, it would be interesting to see how many futures traders and bitcoin holders are under the misguided assumption that a) the cash market is just like the futures market--perhaps based on the perception of tighter futures/cash market correlations in more liquid markets--and b) that the function of the bitcoin futures market will be similar to that of any other cash market commodity.

In a smart article by Lanre Sarumi via Coindesk, Sarumi argues that the launching of the Bitcoin futures market may not be a mere extension of the Bitcoin space, one that opens up into a wider set of correlated operational functions, but rather, a swallowing up of one realm by another. In Sarumi's view, its possible that the Bitcoin cash market, defined by the current notions, motivations, and expectations of Bitcoin holders, is set for a potentially negative and transformative clash against the fundamental mechanisms of the derivatives space. Sarumi identifies a critical incongruity between the mechanisms of both markets and the motivations of both types of market participants.

There is this misguided perception that the futures markets work in a similar fashion to the cash market. In fact, both markets are diametrically opposite.

He states that "cash markets are primarily populated with optimists," while "futures markets...are primarily populated by pessimists." Sarumi is referring to the foundational mechanisms driving both markets--cash markets for holding and transacting assets, and the futures market for hedging against risks threatening the stability of the cash market. As a tool for managing price risk, futures are designed to mitigate the "pessimistic" projections on both sides of a trade--whether buyer or seller--rendering the cash market a potentially unobstructed space of transactional continuity.

And herein lies the problem, according to Sarumi:

"In the bitcoin futures market, the only groups that need to hedge are the miners and current bitcoin holders. Miners will sell futures contracts to guarantee they get at least the given price for the bitcoins they plan to mine in the future. Bitcoin owners will do the same to hedge their downside.

There are no natural hedgers on the buy side. This will inadvertently create pressure on the downside."

Might it be possible that the only group left to stabilize or even drive up Bitcoin and Bitcoin futures prices are the speculators themselves?

Might there be more of a need for miners and holders to hedge on the short side, in which case the bears would overwhelm the bulls?

As Sarumi states, its impossible to tell what kind of effect the futures will have on the Bitcoin cash market. But his warning of the transformational effect it may have on the Bitcoin market and how such a transformation may disrupt the current perceptions and expectations of current Bitcoin holders is, perhaps, one that should be heeded.

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About the author

Karl Montevirgen is an independent content writer who specializes in finance and emerging (disruptive) industries. Having been involved in the commodities and FX markets for the last 9 years, Karl writes for several companies and publications in the finance, blockchain, cannabis, and content space. 

You can view his extended profile, list of publications, and theoretical content work on his LinkedIn page. 

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