What Comes After the Futures – The Next Chapter for Bitcoin

What Comes After the Futures - The Next Chapter for Bitcoin

What Comes After the Futures – The Next Chapter for Bitcoin

A Coindesk 2017 Review

On the ninth anniversary of Satoshi Nakamoto's white paper, one of the world's most respected derivatives providers, the CME Group, announced it would launch a regulated bitcoin futures market.

Not to be understated, this was a pivotal moment in bitcoin's history, and quite simply, the future has never been brighter.

It's safe to say that 2017 has been a remarkable 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 existing trading platforms have been struggling to stay online 24/7. (Even the CBOE website went down as it launched its bitcoin futures market.) In the majority of cases, these outages are not due 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 traditional regulated markets, adding legitimacy for those that doubted its longevity or who still believe it is a fraud (See: Jamie Dimon). Nevertheless, some bitcoin advocates take issue 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 describe bitcoin. That takes a lot 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 due to the unregulated and illiquid nature of bitcoin markets. The decision marked the end of a three-year journey for investors Cameron and Tyler Winklevoss, who had long sought to bring such a product to market.

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 capitalization of bitcoin has risen from $20 billion to well over $300 billion in the nine months since those developments.

Fueling the fire

That's not to say that Wall Street isn't bringing new interest to the market – far from it.

The futures markets have shown that investors want to gain exposure to bitcoin in a regulated manner without having to store the underlying asset. For the average investor, there's a lot of risk is involved with holding bitcoin and this is represented by the significant premiums.

But, aside from the pushing up the price and generating media coverage, the futures market will have profound effects on bitcoin.

Increasing demand will likely lead to more futures markets and creating greater volumes over time. There are currently over 15 applications pending for new ETFs, the volume is coming and to quote Antonopoulos again, there is a long way 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 going to have a lot of volume and that's not bad, in fact that is the first 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 may be the antidote; deepening liquidity, closing the spreads and reducing the volatility, all of which will contribute to greater market efficiency, price discovery and ultimately ensure bitcoin will be a better store of value and medium of exchange.

Knowledge is Power

But regardless of the tempting volatility, no sophisticated traders will jump into bitcoin without arming themselves with knowledge. It takes a time and breadth of disciplines to understand bitcoin and its many intricacies – as well as a little bit of faith.

To that end, the "education" phase is well underway, in fact the CFTC (Commodities Futures Trading Commission) launched an online information portal days prior to the bitcoin futures launch. Its aim is to educate the public on digital commodities.

This period of research and analysis will have many positive externalities ranging from more effective 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 value feedback loop more prevalent in cryptocurrencies such as ethereum.

Every healthy futures market needs a mixture of speculators and hedgers that hold the underlying assets. Typically for markets run by CME, this may be farmers looking to lock in the price of their harvests by short selling contracts of wheat, corn, etc.

Today, the bitcoin futures market is mostly comprised of speculators, and there is a lack of natural sellers as most traders would have to naked short (short without holding bitcoin). At Interactive Brokers, precautions are so great you need five times the collateral to make a trade. For a contract of $100,000, a trader would need $500,000 as margin.

To quote Richard Heart:

"The history of bitcoin is shorts getting rekt, constantly."

Revving up

Still, the ability to hedge the price of bitcoin alters the risk profile of other parts of the industry, particularly mining.

Expect more risk-averse companies to venture into mining industry. After announcing they would start mining the top 10 cryptocurrencies Digital Power Corp. saw a stock appreciation of 750 percent. Digital Power are not alone and numerous tech companies are jumping aboard the mining bandwagon.

With the ability 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 will be invaluable. If this trend continues, Western mining corporations could start to chip away at the currently centralized mining hash power, with 80 percent of it residing in China.

But, it will take time for volumes to build and spreads to close as only a limited number of sophisticated investors are currently capable of carrying out the risky cash and carry arbitrage. No doubt that uncertainties surrounding forking, scaling and regulation will make bitcoin’s journey to an efficient market bumpy.

The most interesting 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 hard work ahead.

Author Charles Hayter Dec 23, 2017 at 23:00 UTC

Posted by David Ogden Entrepreneur
David Ogden Cryptocurrency Entrepreneur

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Bitcoin gets official blessing in Japan

The broader fintech sector is struggling even as cryptocurrencies take off

Entrepreneurs do not often welcome regulation. For Japanese cryptocurrency start-ups, however, a framework put in place by the country’s financial authorities has been a boon.

Rules announced this year by the Financial Services Agency allow people to pay for goods and services with bitcoin and require cryptocurrency exchanges or remittance operators to be licensed and subject to annual audits. These have given bitcoin official approval.

“The Japanese have felt that cryptocurrencies are a scary thing but trading volumes have increased as many now see it as trustworthy thanks to government approval,” says Yusuke Otsuka, chief operating officer at Coincheck, a bitcoin exchange.

The FSA issued operating licences to 11 bitcoin exchanges late last month. Coincheck has applied for a licence and is hoping to receive approval next month, Mr Otsuka says.

The new digital currency rules come as other governments clamp down on cryptocurrencies. China, for instance, has banned companies from issuing their own virtual currencies and is cracking down on cryptocurrency exchanges.

However, for Japan, cryptocurrencies sit within the realm of fintech. The government and banking leaders hope that this sector’s businesses — ranging from artificial intelligence-led investment advisory groups to cloud data storage — will free up cash sitting in bank deposits and reignite the economy.

There has been domestic hand-wringing over the investment going into fintech ventures in Japan compared with that in other developed countries. Japan’s fintech sector, seen as a laggard, had investments of $65m in 2015. This compares with $12bn in the US, $974m in the UK and $69m in Singapore, according to consultants Accenture.

“We’re hoping that fintech will change economic and corporate activity,” says Takuya Fukumoto, director of industrial finance in the economy, trade and industry ministry. The ministry set out the government’s vision in August, calling for an increase in cashless consumer payments, digitising back-office functions and new technologies to enhance cash flow between companies.

Japanese banks, worried that fintech ventures will become mainstream players, are trying to gain exposure to new technologies by either creating a business or investing in a start-up.

Author Emiko Terazono

Posted by David Ogden Entrepreneur
David Ogden Cryptocurrency Entrepreneur

David

Bitcoin’s nearly five-fold climb in 2017 looks very similar to tech bubble surge

Bitcoin's nearly five-fold climb in 2017 looks very similar to tech bubble surge

David Ader, chief macro strategist at Informa Financial Intelligence, shows how bitcoin's gains resemble that of the Nasdaq Telecommunications Index before the tech bubble burst.

Bitcoin has gained nearly 400 percent this year, helped by increased interest from institutional investors.

However, digital currency expert Chris Burniske points out the market value of bitcoin is still a fraction of what stocks were during the dot-com boom.

Vidoe blob:https://www.cnbc.com/e53fec4c-f5c1-4568-b72a-67d362f70882

When charted, bitcoin's rapid gains resemble how stocks surged into the tech bubble before collapsing.

David Ader, chief macro strategist at Informa Financial Intelligence, matched a graph of the Nasdaq Telecommunications Index at its peak in 2000 to bitcoin's five-year run to all-time highs.

"This is the price chart for an overly frothy market, in my opinion. I just don't see anything quite as comparable to this in bubblelicious terms," said Ader, a former top-rated bond market strategist.

Bitcoin climbed more than 3.7 percent Thursday to a record of $4,802.74, up nearly five times in price this year and about 67 percent higher for August, according to CoinDesk.

Bitcoin's nearly five-fold climb in 2017 looks very similar to tech bubble surge

"I think it's going to come to a sorry ending," Ader said. "I don't know anybody who's actually used a bitcoin for any purpose legal or otherwise. This looks like an overly frothy market and frothy markets lose their froth."

Ader said he used the Nasdaq telecom index since many of those stocks led the Nasdaq composite's overall gains during the tech bubble. The Nasdaq telecom index shot up more than 700 percent from 1995 to 2000, before collapsing 90 percent in the next two years. The index remains about 75 percent below its record high.

Bitcoin's meteoric surge this year comes as many on Wall Street are becoming more interested in the digital currency and the blockchain technology behind it. New digital asset investment funds are rolling out and the Chicago Board Options Exchange is planning to launch bitcoin futures.

Many investors also bought bitcoin this month after it survived a relatively uneventful split on Aug. 1 into bitcoin and bitcoin cash, an alternative version supported by only a few developers. Bitcoin cash is up about 180 percent from its Aug. 1 low, to Thursday's price of $588, according to CoinMarketCap.

However, bitcoin could split again this fall because there's another upgrade proposal, and others have warned that the speculative forces behind bitcoin could quickly turn against it.

Here are a few of the alarm bells sounded this summer:

The Elliott Wave Newsletter predicted bitcoin's surge from 6 cents in 2010, but in July said bitcoin's surge has surpassed the tulip mania of roughly 400 years ago and is now showing signs of nearing a sharp downturn.

Later in July, widely followed Bank of America Merrill Lynch commodity and derivatives strategist Francisco Blanch concluded in a sweeping report that bitcoin still faces many challenges to becoming a globally accepted currency.

Then about a week later, a New York University finance professor, Aswath Damodaran, said in a blog post that bitcoin may just be a "dangerous pricing game."

By percent change, analysis from Bespoke Investment Group shows how bitcoin's surge has already well surpassed that of any major stock market bubble.

Bitcoin's nearly five-fold climb in 2017 looks very similar to tech bubble surge

Source: Bespoke Investment Group

That said, some well-respected names on Wall Street have also issued positive reports on the digital currency.

In early July, Thomas Lee became the first major Wall Street strategist to issue a report on bitcoin. A former JPMorgan strategist who co-founded Fundstrat, Lee said bitcoin could reach $20,000 to $55,000 by 2022. On Aug. 18, he established a mid-2018 target of $6,000 for bitcoin.

According to a mid-July Forbes report, investing legend Bill Miller put 1 percent of his net worth into bitcoin in 2014, and the digital currency is one of the top holdings in Miller's $120 million hedge fund.

Stock analyst Ronnie Moas of Standpoint Research published a report in late July predicting bitcoin would rise nearly 80 percent to $5,000 in 2018. He then raised that target in mid-August to $7,500.

Lee and Moas both reason that bitcoin can climb to those levels if even a fraction of the trillions of dollars in gold or other traditional investments move into the digital currency.

Bitcoin has a market value of about $78 billion, and digital currencies overall are worth $170 billion, according to CoinMarketCap.

That makes the value of all digital currencies less than 5 percent of the more than $4 trillion inflation-adjusted value of stocks during the tech and telecom boom, said Chris Burniske, author of the upcoming book, "Cryptoassets: The Innovative Investor's Guide to Bitcoin and Beyond.

"If people think this is the 'big bubble,' then they don't have an appreciation for how big the idea of cryptoassets really is," he said.

Many digital currency enthusiasts agree there is speculation in the digital currency. But they note that, just like the dot-com bubble, companies that were able to utilize the underlying technology then became global giants.

Evelyn Cheng
Writer

Posted by David Ogden Entrepreneur

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