Wall Street’s Mission Impossible: Bitcoin Price Prediction

Bitcoin, coming up to its 10th birthday, is still young as an asset. Professional investors on Wall Street sometimes find it hard to predict bitcoin’s price, let alone retail investors.

Last December, Cboe and CME, two of the biggest derivative exchanges in the US launched their Bitcoin Futures successively. It is likely that investors in both exchanges would have similar trading behavior because they are mostly institutional investors and value regulation. However, the data shows just the opposite.

BABI Finance looked through the Commitments of Traders (COT) reports handed to the CFTC by these two exchanges every Friday, focusing on the leverage funds part and discovered that traders on the two exchanges have entirely different trading strategies, which is in stark contrast to those investing in traditional financial assets:

Usually, trading strategies tend to be similar for identical funds based on the same assets, even though in different exchanges. It is because, in a market where information is transparent, and investors are rational, asset pricing tend to be consistent.

However, for such a young asset as bitcoin, what these investors learned in the traditional market may not work out. About two weeks ago, an article by a trader called Jacob Canfield caught everyone’s attention saying that CNBC tweets got 95% of market predictions wrong.

What’s going on with bitcoin price shows that it’s nearly impossible to foresee its next move, even for Wall Street which gathers the most intelligent analysts in the financial world. Still, according to the position change, CME investors seem to be better at predicting the future than Cboe investors.
Cboe and CME both have a margin requirement for bitcoin futures, which are 40% and 30% respectively. Investors trade more actively on CME than on CBOE. The 24h trading volume for bitcoin futures on CME is around 30k while only 5k on Cboe. It is worth noting that the 24h trading volume on Coinbase, the biggest cryptocurrency exchange in the US, is around 11k.

Intercontinental Exchange(ICE)’s Bakkt is said to launch a bitcoin ETF this November. It is believed to be the first physically-settled bitcoin future product under CFTC’s supervise. This would mark a key development in crypto market since bitcoin futures provided by Cboe and CME are financially-settled based on price difference.

If Bakkt’s plan carries out on schedule, market’s long-oppressed desire for bitcoin could be unleashed. It is reasonable to foresee that there might be a lot of bitcoin funds, bitcoin ETF, bitcoin ETN, bitcoin DAR or other bitcoin derivatives emerging in the future. By then, bitcoin might become a safe way to invest for retail investors.

It is also not a bad thing for Wall Street since bitcoin can be a great substitute for stock bonds, pushing up the trading volume. Institutional investors’ participant could in return smooth out the volatility in bitcoin price, easing investors’ fear in investing in the volatile asset.

Wall Street’s attitude towards crypto assets is changing gradually. Goldman Sachs CEO Lloyd Blankfein once said: “bitcoin is not for me.” This May, he switched to an optimistic tone, saying that he could see a world where cryptocurrency could exist. It is also said that Goldman Sachs has been planning to start a cryptocurrency trading desk. Experts expect other banks could follow.

July, cryptocurrency exchange giant Coinbase was rumored to be exploring how to launch a bitcoin ETF. According to sources familiar with the negotiations, it appeared that Coinbase has asked for the assistance of BlackRock on this matter.

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