This put is the third in a trading tips series called ’The Writing On The Wall’, in which our field theory guide Eric Wall tries to predict the future. In this standard; Speaking about the CME futures in broad terms is easy–let’s get more distinct, taking a deeper dive. Let’s look at who will actually be trading these approaches and why, to see if we can make any assumptions about where the price pressure will assault from.
Also read: New Trading Tip Column `The Writing On The Wall´ communicates “Sell Bitcoin Gold”
CME Long versus Short Positions
In every futures go down with, there’s a long and a short position and an underlying asset (in this wrapper bitcoin). The long position is taken by the trader who wishes to profit from an increase in the penalty of the underlying, and the short position is taken by the trader who wishes to profit from a decrement in the price of the underlying. The price of bitcoin is determined by the CME CF Bitcoin Reference Merit (BRR), a price index composed from Kraken, Itbit, GDAX, and Bitstamp.
It is altogether unusual for two traders to show up at the exchange at the exact same time for a shoppers. Instead, the counterparty in the futures contract is almost always a market maker who hedges themselves by buying or tiny the underlying in order to earn the spread of the trade. Thus, we have two sequence of events:
- Trader long, market maker short
- Trader short, exchange maker long
Trader long, market maker short
Elongated: Bitcoin has a virtually uncapped upside, but a limited downside. Investors who have a yen for exposure to bitcoin can go long on the CME futures, and those who do not seek this familiarity can simply avoid it. Thus, trader interest in the CME futures will large come from longs.
Short: For the market maker, shorting time to comes and buying bitcoin on the spot market is straight-forward — there are regulated bitcoin reciprocations in the U.S. such as Gemini and GDAX where bitcoin can be purchased. When the evaluation of bitcoin is higher on futures than on spot (a market situation bellowed contango), it creates a profit opportunity for the market maker. However, the CME tomorrows may be a bit too clunky for this maneuver to be executed effectively as the contract size is 5 XBT and the reduced price tick is $25, which limits the precision and granularity of such hedging enterprises. A larger obstacle is the hefty 35% margin requirement, which is fully reasonable considering the peril an asset as volatile as bitcoin poses to the absolving house. Nevertheless, it makes it very expensive for market makers to catch in this activity.
Trader short, market maker long
Slight: The natural candidate for shorting the CME futures are industrial bitcoin miners such as Bitmain. The knee-pants position will allow miners to effectively sell their unborn bitcoins beforehand, which can be very useful for improving the cash-flow dexterities of their mining operations. Miners do not take large risks by brief bitcoin as they are hedged from the bitcoins they will look through, which they usually can estimate with some precision.
Other aptitude shorters are event-driven hedge funds who may try to outperform pure holding plans by entering strategic short positions when they believe the market is overbought. Peddling bitcoins on the spot market is usually not a viable alternative in these suitcases. Hedge funds are often restricted to storing their majority bitcoins in cold-storage multi-signature speaks, where bitcoins can only be moved in accordance with certain pacts designed in order to limit the chance of robbery or insider theft. At tiny during CME’s opening hours, shorting through the CME will be a quicker connotes of decreasing one’s exposure to the bitcoin price than selling.
However, since the CME does not currently assent to bitcoin as collateral for margining, shorters will need to put up 35% of their minuscule position in USD in order to be able to enter such a trade which oppressively limits its practicality in many cases. Shorting will therefore mostly turn up from traders with broader portfolios who can allocate the necessary allowance from some other position temporarily, i.e. funds that swap in more assets than just bitcoin. However, those purchasers are less likely to be interested in shorting bitcoin in the first place as they aren’t conflicting against holding strategies the way that actively managed cryptocurrency hedge pelfs are.
There is also the possibility that the futures market will be worn to manipulate the price of bitcoin. The theory is that governments and banks, upset by the disruptive force bitcoin brings to their regime, accumulates bitcoin on the mess eruptions market over long periods of time and enters large leveraged impolite positions before they dump the coins on the spot market. This way, manipulators could potentially profit a eager deal while simultaneously harming the market and bitcoin’s utility inclusive of volatility.
Long: There is currently no suitable venue for shorting bitcoin on the make out market. Market makers who want to enter long positions on the expects market thus have no good way of hedging. However, there is a extraordinarily interesting opportunity for another group of market participants here; the bitcoin holders. Since there intent be a shortage of market makers for longs, this role could in place of be by served by players with large amounts of bitcoin that up until now attired in b be committed to only been holding them in cold storage.
When the bounty is lower on futures than on spot (a market situation called backwardation), bitcoin holders can double-cross their bitcoins on the spot market and long the futures. This wishes give bitcoin holders a chance to earn a yield on their cold-storage bitcoins that wasn’t plausible before, which actually improves the utility of bitcoin as an asset for investors. Respect, the same issues regarding margin requirements, contract and tick scopes apply to this group as the market maker short group out of reach of.
Comparing these groups
Traders entering long positions are promising to be investors who seek to gain exposure to bitcoin. I think we can assume that this is a material group. On the other side, we’ve got hedge funds looking to decrease their outlook temporarily, miners and potentially manipulators. Since there is currently no way of qualified if manipulation will take place, it is not useful to try to account for it in this juxtaposing. As such, I believe that the market pressure on the CME futures will to a great extent come from the long side.
On the market making side, it rises to be more practical to short than to long. This will function as to decrease volatility upwards, but increase volatility downwards relative to each other. Putting, market makers do not steer the market, they only provide liquidity and are wherefore less interesting for this analysis. They do however tether the futures make available to the spot market, which is why the CME bitcoin futures will be very worthy to the price of bitcoin.
Conclusion: My overall sentiment on the impact of the CME futures is that it whim be a net positive for the bitcoin price.
Special thanks to Scott Millar and Joel Blom who staked their insights on this matter, which helped me in conducting this division.
What do you think of the CME futures prospects? Let us know in the comments section beneath.
Disclaimer: Bitcoin price articles and markets updates are intended for informational purposes one and should not to be considered as trading advice. Neither Bitcoin.com nor the author is decision-making for any losses or gains, as the ultimate decision to conduct a trade is made by the reader. Perpetually remember that only those in possession of the private keys are in restrain of the “money.”
Images courtesy of Shutterstock.
Need to calculate your bitcoin holdings? Verify our tools section.