08 Dec 2017

Bitcoin has Forever Expanded the Market of Currency Speculators, Perhaps the Fundamental Change that will Support Crypto-Currencies into the Future

Author:

Main street is certainly paying attention to Bitcoin, as just days after it dropped precipitously, it bounced to new highs — incredible highs. And, with people comforted that they can sell their Bitcoin and convert it back to cash with a few clicks from their iPhone while sitting at the beach, they are comforted (and pleasantly surprised with the ability to double their money in a few days of hard work clicking buttons!). Seems nice… imagine if you had bought in, in the beginning of the year! $100,000 bought in January could have sold in December for more than $1.5 million!

But wait; is this real currency speculation or something different — at least today?

Today, you can’t really buy much with Bitcoin. You can’t really bet that Bitcoin will go down (trade futures or bet on future prices), other than deferring purchases of more or selling what you own. But you can buy. And sell, as long as there are buyers. But what happens if too many people want to convert to cash at once?

In China recently, Chinese authorities ordered Beijing-based cryptocurrency exchanges to cease trading and immediately notify users of their closure, signaling a widening crackdown by authorities on the industry to contain financial risks. Platforms were required to report to the government **how they will allow users to make withdrawals in a risk-free manner and handle funds to ensure that investors’ interests are protected**. Did this damage the Bitcoin currency speculation craze? The price dropped 40% on this announcement; to a September 2017 low of below $3000, but then skyrocketed for no apparent reason to $16,000 within 90 days. Perhaps this made the currency more interesting for all of these Chinese investors; opening trading accounts elsewhere?

What is coming? Perhaps one of the biggest changes to the Bitcoin market will be the Chicago Mercantile Exchange offering futures trading of Bitcoin (scheduled to begin next week).

“…in the second week in December you’ll see our contract out for listing,” Terry Duffy, chairman and CEO of CME, said Monday on CNBC’s “Power Lunch.” Futures allow traders to bet on the price of an asset at a point in the near future. If a trader sells a futures contract in anticipation of a decline in bitcoin, the trader locks in a gain if Bitcoin subsequently drops. Trading to profit off a price drop is known as shorting.

How may this impact Bitcoin price?

Since Bitcoin is at its heart (today at least) speculation based on hype and hope, perhaps Bitcoin price “influencers” will decide it is time to bet against the currency — after all, why not profit on the price rise all the way up (as they have done) and then profit all the way down (by trading CME futures).

But won’t futures trading bring more institutional money into the market for Bitcoin? Well, that is not clear. With futures trading, the money will not be pouring into the Bitcoin market. It will be buying synthetic derivatives that don’t directly impact bitcoin at all. You can trade without ever converting dollars into Bitcoin (avoiding the risk of whether or not you will be able to convert Bitcoin back to dollars if there is a swift drop in the market).

Perhaps the most fun about Bitcoin and the underlying cause of the rise in price is that Bitcoin made currency speculation and trading simple and fun for everyday individuals — which may have forever expanded the market for currency trading and may have made crypto-currency speculation a sustainable money-making profession; and with the big swings in price, beautiful images of gold minted Bitcoins, and sexy techy talk, it has made it more fun than trading traditional currencies.

Tech Essentials invites you to hear how other readers have employed Tech Essentials security, compliance, and productivity tools and tips. Listen to their stories in the Tech Essentials webinar series recordings — click to access here.