What Does the Futures’ Hold For Bitcoin?

This week, Bitcoin had the honour of being baptized into civilized society via the futures market. Over the past few months, it has gone from being synonymous with illegal trading and the Dark Web, to a positive household name. The digital currency has undergone a magnificent story – going from underground bedroom project to outperforming all other assets on the MSCI and being traded on Wall Street. But could the euphoria all be coming to an end?

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Most of us know the history of Bitcoin and how it works, and if you don’t – you can read our past blog here to get some information on it. For now, let’s fast-forward to today. There are three salient points to be taken from Bitcoin’s acceptance onto Wall Street.

Wall Street’s Reaction to Bitcoin

Firstly, which has already been alluded to, is that Bitcoin has been legitimized. In effect, it has been promoted from the Minor League to the Majors. It is more than likely that fringe watchers will invest now after watching how the asset performs. It also means that people can trade Bitcoin without having to use Gdax and other (potentially) unintuitive software to invest; it also gives bearish people an ability to hold a position on the asset.  Traditional asset managers interested in Bitcoin now have a way into the currency. Getting into the futures market isn’t going to alter Bitcoin forever, but it is certainly a gamechanger. For a lot of people, Bitcoin suddenly has become a lot more attractive; and the asset has risen nearly 300% since the first announcement in October.

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Secondly, now that Bitcoin is in the “Big League”, it is likely to undergo a correction at some stage. Of course, this could be a matter of years or months. Bitcoin’s growth can’t be maintained, and investors will want to see less volatility if Bitcoin is going to be taken seriously by major investors. Bitcoin will eventually level out.

But this does not mean that Bitcoin is a bubble, nor does it mean it is not a bubble. Let’s unpack that information. If it is a bubble, then, of course, we will see people selling Bitcoin like tulips in 17th Century Holland pretty soon. But that is doubtful, as Bitcoin does have intrinsic value. It is more likely that Bitcoin will reach an overvaluing, and eventually a correction. This doesn’t have to be the Apocalypse – it could be that there is a healthy medium for Bitcoin that sits right for everyone. Acceptance onto Wall Street could help it find this correction.

This brings us nicely to the third salient point – how will Wall Street react to Bitcoin? Up until now, the validity of Bitcoin has been up in the air, value has been for the most part been determined by speculation and bedroom buyers. Fringe buyers once again will be watching Wall Street. If the futures market is successful, it will encourage more people to get involved.  The CME and CBOE give the rest of the world, most importantly the “unsure” part of the rest of the world, something more tangible than hearsay on the value of the digital asset.

What should we take away from all this information?

Being traded on Wall Street via futures means that Bitcoin will likely do well in the coming months, but like all good things, it will eventually experience a correction. Cryptocurrency has intrinsic value, and while people figure out if a Bitcoin is worth 5, 10, 50, or 100 thousand dollars we will see a lot of volatility.

Bitcoin – The Bull that refuses to back into its cage

Bitcoin is now trading above the ceiling predicted to be its cap – it is the bull that remains uncontrollably volatile but unashamedly confident.

bitcoin-2643159__340  In a previous post, I explored how Bitcoin worked and explained the functionality of the centralized ledger. This week I have a new question. Why do people have faith in a currency that has no tangible resource backing it? Traditional currencies use gold, what does Bitcoin have? Hope? I will supply two reasons I find particularly compelling that may explain sudden interest for Bitcoin, however bear in mind that there a multitude of factors, and there is no monocausal reason for the sudden growth of Bitcoin.

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Firstly, financial commentators have commented on the magnitude of growth Bitcoin would experience if it were to be backed by a finite resource like gold. Bitcoin is a currency that has no tangible resource dictating its value. Its value is based precisely in what people think it is worth (or will be worth). Currently, Bitcoin is not backed by gold, or any other finite resource, but what if it were?

Standpoint Research’s Ronnie Moas reported that there is $200 T tied to cash, stocks and bonds. He stated:

“I am not excited about putting my money into any of those – If 1% of that $200 trillion finds its way into crypto in the next 10 years, you will be looking at a 2 trillion-dollar valuation – 10 times what it is today”

A theme common with cryptocurrencies. People are investing on the whim that it “could be” massive.

Secondly, trading Bitcoin may become safer – and hence attract attention from more conservative hedge fund managers. The more investors, the more Bitcoin will grow. Last week, the world’s largest exchange operator by market value (CME Group) has announced it is readying plans to offer futures on Bitcoin.

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This will give momentum to cryptocurrencies’ move away from the fringes of finance. But more importantly, the Chicago–based trading venue said it intended to add Bitcoin to its stable of futures on interest rates, stock indices, commodities, and currencies by the end of the year.

If hedge fund managers can long and short different prices, they can hedge against volatility. Currently, Bitcoin does not allow this. If it were to, which the CME have suggested, then Bitcoin becomes more attractive to less risky investors – once again increasing the amount of investment, and the “normativity” of the currency.

These two points share something. Both signpost to us that Bitcoin is doing well because people think it will do even better in the future. The potentiality for the currency is very high. And, although now there is little tangibility to Bitcoin besides hope and (somewhat) empty prediction, it seems that in the near future Bitcoin could become a global phenomenon.

Does the currency of the future have a future?

Bitcoin’s success has been remarkable. Its most important characteristic, and what makes it different from money (USD or GBP for example), is that it is decentralized. No single institution controls the Bitcoin network. This puts some people at ease – as it means banks and government have no control over their money. Bitcoin is the Rocky Balboa of economics. During the start-up, one Bitcoin was valued around $35; now, it soars anywhere between $5000 to $6000 dollars. This being said, Bitcoin is incredibly volatile. Prices rise and dip considerably month to month, and sometimes day to day. In this week’s article, we will take a look at how bitcoin works, and see what experts predict of its future prosperity. Let’s see if Bitcoin can go the distance.

Bitcoin is a cryptocurrency monitored by a ledger. The ledger is available to be downloaded by anyone, and with it, you can see every account and every transaction ever made. If I want to buy a sofa from you and pay you 0.5 bitcoins, then the coins will go from my e-wallet to your e-wallet and this will be marked onto the ledger. This is available for everyone to see. Simple.

Although all records of transaction are in the public domain, each user remains anonymous. Transactions and accounts (E-wallets) are tracked by a number, and not a name. It would be impossible to trace an account to a person using the ledger alone. Although anyone can check the ledger, they cannot use it to link a transaction to an individual. But this anonymity comes at a price.

As all accounts on the ledger are mathematically coded, the ledger needs constant work to be kept up to date with pending transactions. When you pass money to someone, it creates a key which creates an e-signature from your personal wallet code and the recipients’. This mathematical key is unique and cannot be replicated.

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When you make a sale, everyone in the world’s ledger is updated with this new transaction, and everyone can match this transaction against the ledger. This keep Bitcoin secure.

Mathematicians will link pending transactions to past transactions, this way, everyone’s ledger agrees. Coincidentally, this is how Bitcoins are distributed to people. Someone links a transaction onto past transactions and is paid in Bitcoins. This allows for Bitcoin to be self-sufficient, and have no centralized authority, like the federal reserve to the dollar. This process is called data mining. In turn, no one can print money and Bitcoin is distributed by the system for updating the ledger. Bitcoin is safeguard by everyone, for everyone; and any person who owns a Bitcoin is a part of the Bank of Bitcoin.

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It sure is interesting to see how it works; and, even though it can be daunting understanding it at first – Bitcoin is a simple concept. The founder stated that once understood, it makes much more sense than centralized currency as it is maths. But how does it compare to hard currencies? And does it have a future in the way the world works?

Goldman Sachs made its position clear, they believe “gold wins out over cryptocurrencies in most of the key characteristics of money.” They compared the two in terms of durability, sustainability, intrinsic value, and unit of account. On the other hand, cryptocurrencies take up significantly less space – but new alternatives are being created every day. There is no competition when it comes to the value of gold, but there is to the bitcoin. Goldman rounds of their statement by pointing out that Bitcoin is dangerously volatile. The Bitcoin-to-U.S. dollar volatility on average was nearly 7 times that of gold this year (2017).

Frustratingly, there is not enough evidence to come to any conclusion as to how Bitcoin will do in the future. But the central question we need to bear in mind isn’t whether or not Bitcoin is a fad or has staying power, its whether Bitcoin has the potential to be the new gold. Whilst commentaries from Goldman’s state it does not, it is worth mentioning that they are in the process of building their own tech to help decrypt and data mine. This indicates that despite their comments, they still have some faith in the “currency of the future.”

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Henry James and James O’Leary do not hold any stake in Bitcoin.