Could the CME delay Bitcoin Futures?

CME Bitcoin Futures Risk

The CEO of Interactive Brokers, Thomas Peterffy issued a letter to the CME requesting delay of the Bitcoin futures launch citing volatility which threatens the entire CME futures system.  The CME has installed bitcoin futures halts for price moves greater than 7%, but Bitcoin has shown it can move much more than that.  Peterffy does raise a good point – if Bitcoin does drop 25% or more in a matter of hours could this “blow up” one of the CME institution leading to margin calls, etc?  The CME has stated that it wants to require much higher margin than other products:

CME Bitcoin Futures Proposed Margin
CME Bitcoin Proposed Margin

I’d surmise that is probably not enough. The main reason is that Bitcoin does not yet have enough correlation with other assets to hedge. If you are long corn and short soybeans there is probably a correlation there that works for some type of hedge. Not so for Bitcoin. There is not yet a verifiable way to hedge a long position in Bitcoin Futures, either. Therefore if major losses are taken in Bitcoin the traders will have to liquidate other positions like oil, or even S&P futures. You could then surmise that a massive loss in Bitcoin futures could hit the stock market overall if traders have to liquidate S&P futures.

CME Bitcoin Price Index

The second issue with all of this is how the CME is creating its Bitcoin Price Index. (FYI The CME provides a reference paper here). Originally the CME included Bitfinex and OKCoin exchanges in addition to 4 others (GDAX, itBit, Bitstamp, Kraken). Bitfinex and OKCoin had to be dropped as they decided to punt US customers. Kraken on the other hand has had major tech issues. A quick search on reddit reveals irate customers complaining for months that you cannot login or place orders. Bloomberg too has picked up on this story here.

I bring this up because the CME is basic its prices on exchanges which may or may not be in existence in the very new future. When Bitcoin traders start to fear the viability of an exchange the Bitcoin price on that exchange can move way out of range relative to the other exchanges (see here).

At the end of the day Bitcoin Futures make sense, but they shouldn’t be launched hastily.  If it launches and breaks, that could end up badly for all those involved and be a permanent black eye for Bitcoin on the institutional level.

If You’re a CEO just say “Bitcoin”

Squares CEO Jack Dorsey (also CEO of Twitter) announced Square is going to add the ability to buy Bitcoin through its app and the stock is up ~3% today.

square bitcoin chart
square bitcoin chart

There are other examples here where stock news comes out including buzzwords like “bitcoin” and “Blockchain” which sends the stock soaring. If the recent Bitcoin/Bitcoin cash debacle proved anything its that this crypto space is rapidly changing and highly speculative. If you’re a CEO you can’t possibly predict your revenue from adding Bitcoin. Bitcoin is growing slowly as a payment method but its dominated by traders and holders. Yes “blockchain” is a revolutionary idea that will change business but I question the incremental value of Square adding Bitcoin purchases. Don’t get me wrong, as a holder of Bitcoin its great news. But is it really going to move the needle for Square in the near future?

I am not sure if the people buying Square on this news are just bullish on Bitcoin and its a way to express that, or if they think this is really going to boosts Square’s business. I wonder if the launch of Bitcoin Futures on the CME this December will cool this off a bit.

To me it reeks of speculation when stocks rip up just using these catchphrases and is something that helps build the Bitcoin “bubble” case.

Crypto Derivatives CFD’s

Embarrassingly this is the first I’ve come across a crypto derivative contract called contracts-for-differences, or CFDs. So all those gamblers betting on horses or Manchester United can now play Bitcoin or other cryptos without having to actually buy the crypto.

Apparently these things are like options or futures contracts, only you make them directly with your broker. They’re also traded on margin so the losses can mount quickly, especially in crypto land where things move 20% in a blink. You also have major counterparty risk because depending on whom you trade with – they might not be able to pay you back. Or, they might just refuse to.

Good article here. Apparently these things are coming under heavy scrutiny from regulators. Seems best to stay away.

Something Stinks About Bitcoin Selloff/Bitcoin Cash Rise

What follows is all a guess – conjecture.

Bitcoin was due for its Segwit2x hard fork around November 14th. The price heading into the end of last week was all time highs around $7,500 USD.  The  proposed fork caused some controversy and there was bickering for months. On one side was existing Bitcoin supporters, and a separate small but influential group formed by the “New York Agreement“(NYA). The NYA gang included some of the biggest names, most pioneers in Bitcoin who carry much influence.

They also most likely have stacks of Bitcoin (just google their names) held for years. That most likely means they hold Bitcoin Cash coins from the fork several months ago. Suddenly these 6 write a note, calling off the fork.

This is what they said (emphasis mine):

“Our goal has always been a smooth upgrade for Bitcoin,” a group of leaders in bitcoin development told members of the SegWit2x mailing list Wednesday. “Unfortunately, it is clear that we have not built sufficient consensus for a clean blocksize upgrade at this time. Continuing on the current path could divide the community and be a setback to Bitcoin’s growth. This was never the goal of Segwit2x.”

First there is a quick spike of a few hundred dollars. This would seem to make sense as now there is more certainty for Bitcoin. Suddenly, however the price tanks.

Bitcoin Price Crash
Bitcoin price crash following segwit2x cancellation

Bitcoin Cash immediately starts to take off.

Bitcoin Cash Price after Segwit2z
Bitcoin Cash Price after Segwit2x

Here is a theory – I have no proof of this. You have a core group of Bitcoin “elite” with giant pockets of both Bitcoin and Bitcoin cash. To “protect Bitcoin” they call of the segwit2x fork and immediately start dumping Bitcoin and buying Bitcoin Cash. They already own Bitcoin Cash from the fork in August 2017, and they are selling Bitcoin at all time highs. Tweets and blog posts suddenly start shooting out everywhere announcing the “death of Bitcoin” and volumes spike through the roof.

Sounds nuts, right. Well guys did this is stocks in the 1920’s (read here). Basically a bunch of guys would get together and start pumping up a stock, pushing out fake information. That got greedy speculators on board ad caused them to run the price up. The guys on the inside would then dump.

Who knows if this is what happened. Its all very strange, but I suspect well find out in the coming weeks.

 

 

If ICO’s Slow Can Ethereum Rise?

According to coinschedule October (~$400mm)had much less ICO issuance than November (~$800mm) Coincidentally the SEC is starting to go after the ICO scam artists, something thats been sorely needed as people (aka “Investors”) can’t be relied upon to do their own due diligence.  Regulation should help remove some scams and improve the quality of the ICO offerings.

While I had soured on the price of Ethereum as a result, it appears (its still VERY early) that if this ICO market can slow issuance the price of Ethereum could propel.

From a technical perspective you could argue a move through $350 would signal “breakout” and possibly higher prices.

Ethereum Price Chart
Ethereum Price Chart

Plus the Bitcoin fork is out of the way – it appears Bitcoin price was propelled by many looking to collecting a “free” bitcoin when the segwit2x for took place. Its common for traders to sell ethereum, litecoin or other “alts” to go long Bitcoin (and vice versa).

Bitcoin For Called Off, Price…Drops??

The bitcoin hard fork knows as Segwit2x was “called off” today causing a sudden price spike then drop.

The strange thing about this is that the fork was a major point of dispute for those in the Bitcoin community and posed some risks. One would think that when you eliminate a risk the price would go higher, but not here.

This says to me that people were piling in ahead of the fork in anticipation of a “dividend” and nothing more. That tells me that greed is driving price, and its a bit concerning.

Ethereum Parity Bug

Ethereum wallet company Parity Technologies found a bug in their code that leaves hundreds of thousands in Etherum (millions in USD) exposed to “being deleted”. Read here if you want more on this.

Or, more succinctly:

Turns out Parity wallets were hacked in July of ’17, too (see here).

This is what happens when untested technologies are used in “production”.

This is not supportive for Ethereum’s price at a time when Bitcoin is exhibiting dominance and ICO’s are coming under intense scrutiny. It shouldn’t take away from the promising future of the technology.

Maybe Bitcoin Futures Isn’t Bullish for Bitcoins Price

CME Launches Bitcoin Futures on November 14th. This is a big deal because it legitimizes Bitcoin as a player on the “institutional” stage. It says there is major demand from large players and that the exchanges and regulators see a future in the asset class.

My sense is that Bitcoin owners view this launch as unbelievably bullish for the price of Bitcoin. Bitcoin tends to have younger investors who in general have had nothing but success from owning, trading or holding Bitcoin. They buy and the price goes up. Some well known “old guy” says something bad about Bitcoin, yet the price goes up more. Bitcoin holders thump their chests, mock the “old out of touch” naysayers and go back to talking about their wealth.

By the way, I’m not here to guess what will happen to Bitcoins price. I own Bitcoin and think its an amazing asset. Don’t trade off of what I write here.

Not All Bitcoin Futures Traders are Buyers

Lets say that you are Warren Buffet and you think Bitcoin is a huge bubble (he actually does, see here). If you wanted to express that investment view (i.e. short Bitcoin) its pretty much impossible. He’s not going to open a Coinbase account and start shorting (explanation of why here).  With CME futures though he’d have no problem launching his short orders. Thanks to the exchange he doesn’t have to worry about counterparty risk, regulator risk or operational risk.

For the first time ever these “old out of touch guys” can back up their “bitcoin bubble” views.

Bitcoin, Gold and Futures Trading

Many like to say that Bitcoin is “the new gold” from an investment perspective. Both bitcoin and gold capture the same objectives of getting your money out of the banking system, being an inflation hedge, etc. Bitcoin, however,  is much easier to store and transport. Gold retailers also say Bitcoin is hurting their business.

Gold futures started trading on the COMEX NY exchange in December 1974 and as you can see in the chart below, it didn’t equate to a major increase in price in the months or even years following.

Image result for 1974 gold futures

Who is to say that this has anything to do with CME Bitcoin Futures trading, but its an interesting analog. (Note these chart annotations where on the chart, they’re not mine and irrelevant to this post.)

Between Futures launching on November 14th, and the possible Segwit2x fork  which should happen on roughly the same day its shaping up to be a wild month for Bitcoin.

So Paris Hilton Did Call the Ethereum ICO Top?

Paris Hilton tweeted she was “participating” in the Lydian Coin ICO back on 9/3/17. Ethereums all time high was ~$390 and occurred just a day or two before this ominous tweet.

Paris Hilton “Involved” With ICO

We likely wont see anything like this ever happen again. The SEC has decided to step in and warn other celebrities to stop shilling ICOs.

What Do CME #Bitcoin Futures Mean for Bitcoin

Everyone in crypto is excited about the launch of Bitcoin futures on the CME (Chicago Mercantile Exchange). The CME is one of the largest futures exchanges in the world. A few notes on this as I am reading a lot of nonsense out there:

  • Overall this has to be seen as bullish for Bitcoin and establishes the asset on the “institutional” playing field.
  • Bitcoin futures are CASH SETTLED which means when the contract expires you are charged or credited in USD the difference between the futures price and Bitcoin spot price. If you’re futures contract is $7000 USD and Bitcoin spot is $6000 USD you will lose $1000 USD from your account.
  • Cash settlement means the futures volume doesn’t necessarily translate into actual Bitcoin  volume. That being said I’d wager that Bitcoin volumes would move higher as traders arbitrage the futures versus actual Bitcoin.
  • Yes, some people will hedge with actual Bitcoin but settlement is still a major issue for institutions and will prevent them from trading actual Bitcoin. Essentially Hedge Funds and Banks can’t yet handle the storage and delivery of Bitcoin. (see here) Plus Bitcoin itself hasn’t been explicitly approved by the SEC or other regulatory bodies.
  • LedgerX already launched Bitcoin options which many will use in conjunction with Bitcoin Futures. You can buy or sell the options and use the future as a hedge if you’d like to trade the “volatility” of Bitcoin. You can also express a directional Bitcoin price view using Bitcoin futures and then hedge with options.
  • I find it somewhat ridiculous that this is a grand conspiracy by the banks to take down bitcoin. CME is a for profit exchange and Bitcoin is an asset with rapidly growing demand.