As we rocket above $14,000 a bitcoin, I look forward to the debut of bitcoin futures trading this weekend. Will the futures actually be used for hedging (to reduce risk), or will they only be used to speculate?
On the long side, it’s tough to see a hedging scenario, because there are no bitcoin consumers as there would be in a different commodity market such as cattle or oil. Bitcoin is not consumed or transformed into other products, so there are no bitcoin buyers that need to offset upside risk. Because of this, bitcoin futures buyers will be engaging in a purely speculative play.
There is a counterargument to this that assumes bitcoin is akin to a currency future, which premise I’m currently unwilling to admit due to bitcoin’s volatility and its appreciation as a speculative asset unsupported by an increase in transaction volume. If you believe in this premise, you could say that if you anticipate needing to transact in bitcoin in the future, but you don’t want to hold (hodl) bitcoin until that time, you could buy a future and sit tight, then when you do buy actual bitcoin to transact, close out the long future, thereby having mitigated your exposure to upside risk. If there are people or entities in this category, I’d like to learn more about them!
On the short side, however, it gets a bit more interesting. Although the futures might be sold by speculators betting on a price decline, there are actual bitcoin producers who could sell futures to offset their downside risk and lock in a sales price (although these futures are cash-settled, the effect is similar) for the coins that they’re mining. This way they can act like an oil exploration and production company and sell futures to subsidize and hedge their capital expenditures for production, which in the case of bitcoin would be the cost of mining rigs and electricity.
What about buyers of actual bitcoin, will they use futures to hedge? Maybe, but it seems unlikely to me as the buyers of bitcoin don’t exactly seem like the hedging type. What do you think?
On the flip-side of this, short futures players may actually create a demand for more bitcoin and drive the bitcoin price up to some degree, because speculators playing the short side, if they’re to keep from being wiped out, will need to hedge by buying bitcoin to mitigate the risk of unlimited losses. I don’t know who’s going to be hedged shorting bitcoin, let alone naked shorting this insane momentum asset, but I’m sure there are some who will be.
I believe the futures exchanges are going to make the margin required to trade bitcoin futures higher than normal, to keep the most inexperienced of speculators out. I hope there are some required educational materials that new traders are made to watch as well, explaining the risks of leverage in the futures market, the risks of unlimited losses in shorting futures naked or selling calls on futures naked, and the possibility of losing more than your account deposit!
Some topics I’d like to discuss in future futures posts (ha!) and future bitcoin posts: the risk to exchanges of introducing this new futures product, if any; and how the use cases of bitcoin compare with the use cases for tulips with breaking virus.
Also, crypto kitties? Really? What am I missing, besides the epic amount of money I’d have if I’d seen this coming?
Great YouTube Resources
Here are some excellent and balanced bitcoin and crypto resources for your listening pleasure:
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