Amidst the excitement and anticipation for 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 into 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 motivations of both markets and 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 is 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, it’s 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, a warning that should be heeded.
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