On April 4th, two days after Bitcoin’s rise to $5,000, the Chicago Mercantile Exchange (CME) announced that a record had been broken. That record was Bitcoin futures trading volume. In a Tweet the CME said that 112,700 Bitcoin had been traded, equivalent to $563 million dollars. That’s a tremendous sum and it came close to matching the combined volume of the top ten exchanges, which amounted to $685 million.
While the cryptocurrency community is notorious in their derision of futures there are actually a couple of important advantages provided by the financial instrument.
Where is the Volume Coming From?
Retail investors and hodlers tend to not use futures. They are complex and the smallest contract the CME offers is for 5 Bitcoins. So where is the volume coming from? According to a recent CryptoSlate article, a “significant portion” of this trading is coming straight from Wall Street.
CME Bitcoin futures had a record trading day on April 4, hitting an all-time high volume of over 22.5K contracts (112.7K equivalent bitcoin), surpassing previous record of over 18.3K (64.3K equivalent bitcoin) on February 19. More #Bitcoin futures. $BTC_F https://t.co/kWYK203apA pic.twitter.com/CX5nF8dXyv— CMEGroup (@CMEGroup) April 5, 2019
This make sense as it’s typically wealthy investors, hedge funds and other large trading desks that use futures. And while these “whales” are not universally loved, their heavy-handed trading is responsible for two positive developments for the crypto ecosystem.
Bitcoin Futures Legitimize the Market
One of the problems that the cryptocurrency market has had to deal with is the perception that it’s a scam. That sounds ridiculous to anyone who understands crypto, however, there are still millions of people who don’t believe it’s on the level. Thankfully, record setting futures trading can change that.
When half a billion dollars’ worth of futures are traded in a single day people start to take note. While the men and women of Wall Street have made some horrible mistakes in the past, there is almost no chance they would ever drop that much money into a market if it was fraudulent.
One Step Closer to an ETF
Secondly, a high level of futures trading may also increase the chance that a Bitcoin ETF is finally passed. One of the criteria for an ETF is accurate price discovery. That requires investment vehicles like futures and options, which allow investors to protect themselves against price drops.
Now that the volume in the futures market is picking up, the chances of an ETF being approved are rising as well. To be sure there are still many other problems to be ironed out but it is at least a step in the right direction.
What Happens Next
The fact that there are a record number of futures contracts being traded is a very good thing for the cryptocurrency ecosystem. It not only legitimizes the market but proves that Bitcoin is healthy and even with a modest rise in prices savvy investors are ready to reenter the market.
As they do they’re going to attract the attention of the bigger fish (institutional investors) and that’s when the real fireworks are going to start to fly.
1- Do not invest in every ICO – most of them are a scam.
2- Crypto is a heavily manipulated commodity and the price can change at any moment.
3- The creation cost of a coin represents the “wholesale” price – It is always better to buy when the price is close to the creation cost.
4- Crypto has a natural cash flow that dictates the selling pressure. Like, 1800 bitcoins are mine each day so 1800 bitcoin must be bought at the current price (“means market needs new $18 millions of investment every day if the price is $10,000 to maintain the current price“).
5- Patience and timing are key to making a profit:
Buy, when the price is close to the creation cost.
Sell, when the price is way high off the creation cost.