Since the CME made Bitcoin futures available on December 18th 2017 the price of Bitcoin went downhill. On December 17th 2017 the price of Bitcoin made an intraday high of $19,911. The rest is history.
Since then we have spent a lot of time reflecting on the question how Bitcoin futures exactly will impact the crypto market, in particular cryptocurrency prices. Ripple’s recent breakout was an eye-opener for us, and we believe we have found the answer, finally, which we discuss in detail in this article.
Bitcoin futures: the start of short-selling
Whether there is a direct link between Bitcoin futures and Bitcoin’s price peak is beyond the scope of this article. It may or may not be the case, most likely there is a direct link in our opinion, but, again, not the primary reason we write this article.
With the introduction of Bitcoin futures traders could start short-selling.
Up until that point only ‘physical’ Bitcoin trading was possible. Any sell off was primarily the reason of profit taking. Vicious sell offs in Bitcoin are nothing new, in the early days they were also aggressive. But the market can be actively traded at two sides now, a totally different dynamic.
This is of course a fundamentally important shift, one that has to be considered by crypto investors.
So what exactly does this imply, both for Bitcoin’s price as well as other cryptocurrencies?
Bitcoin’s upside potential may be capped
While we don’t disagree with this writer who compared Bitcoin with gold we also don’t find in that article the answer we are looking for.
If we look, for comparison, at gold in the period 2001 to 2011, we see that gold’s price rose almost 10-fold in that time period. That was at a time gold futures trading was possible.
Similarly, crude oil crashed 72% in 2014 and 2015, needless to say that the crude market trades with futures.
Is any of this useful to Bitcoin?
Not entirely, because the crypto market structure is totally different.
Arguably, Bitcoin will go much higher in the years to come, and gold and crude oil show that large price movements are possible with futures trading. But we believe that the 100-fold returns are a thing of the past. Yes, a 10-fold rise in Bitcoin’s price over the long run is certainly still possible, but likely short sellers will provide lots of stopping power on the way up.
Institutional money will soon enter the crypto market
As explained in great detail in our Ripple price forecast for 2019 we see 3 fundamental catalysts for the XRP token, one of them being institutional investing. Think of the Bakkt platform as well as the Nasdaq offering cryptocurrency investing to institutions.
So here is the point: If you were an institution with millions of investment dollars which cryptocurrencies would you choose? Obviously you would apply the ‘low risk high reward’ principle, right?
So let’s do the exercise from an institution’s perspective, and create our top 3 cryptocurrencies to invest in, assuming that the 10 largest cryptocurrencies would be available for trading.
- Bitcoin will likely be a top favorite because, assuming futures will reduce the price volatility (admittedly, it is an assumption). Bitcoin has this appeal of ‘safety’ as a crypto investment.
- Ethereum: Ethereum has become too large and fundamentally too important to ignore. Ethereum is a straightforward concept, growth is clear and outlook is positive. The fact that there is no ‘company’ backing Ethereum might be a negative from an insitutional investing perspective as well as the dependency on the founder(s).
- Ripple: It is the only crypto company with so many respected clients. The list of Ripplenet clients is impressive, primarily large international banks. Moreover, Ripple is piloting their xRapid solution for payment service and processing providers with will have a much larger audience. Ripple is the most advanced crypto company, both in terms of company maturity but also technology adoption, which also offers a cryptocurrency.
- Bitcoin Cash: I personally would start with the question “what exactly is Bitcoin cash trying to accomplish, and which added value is it already delivering?” Unfortunately, the answer is not sufficiently clear, so unlikely that Bitcoin Cash will make it to the shortlist.
- EOS: While the expansion of EOS is impressive there may be two aspects creating a barrier with Western institutions. First, EOS is very technical in nature, likely too technical for decision makers to understand. Second, there is lots of activity and focus in Asia, and this may come across as a lack of transparency.
- Stellar Lumens: This is a fast growing crypto startup. The recent acquisition of Chain by Stellar makes this a much more trustworthy cryptocurrency. With this, they have clients like Visa, Citigroup and Nasdaq. As a decision maker to invest institutional money I would be very interested.
- Litecoin: We lack clarity on the adoption and future growth of Litecoin. The fact that the founder sold its holdings last year would not give me great confidence. “Not convined,” would be my answer.
- Tether: While the price rise of Tether has truly been spectacular it seems that the added value is harder to explain. The manipulation allegations as explained on Wiki would make me very nervous. While the functional aspect has some value there is also this immediate question “what’s the real differentiator on the long run” which is hard to answer.
- Cardano: In all honesty I personally (with my extensive technology background) am not able to articulate the real added value of Cardano. I personally doubt that institutions will understand it in a way to be seduced to invest in it.
- Monero: It has an easy to understand concept. There is an added value in the private aspect of digital money. There is a lack of transparency on adoption though, and we consider this a serious problem for institutional investors.
Our conclusion after doing this exercise? For institutional investors the highest level of confidence will probably be for Ripple and its XRP token, followed by Bitcoin, Ethereum and Stellar Lumens.
100-fold returns in the crypto market
While short selling is likely going to cap the extreme upside potential in Bitcoin which is now becoming a more mature investing vehicle we believe that capital will continue to seek 100-fold returns. It is simply a characteristic of the crypto market, and it will likely not go away. Rather, the dynamics will change over time.
Assuming that crypto retail investors will also mature over time, we believe they will seek real added value when deploying their capital.
Moreover, from an institutional perspective, we believe that the shortlist of cryptocurrencies they will invest in is really limited. We believe that Ripple will be on the top of their list.
Assuming that all our growth assumptions on Ripple laid out in our Ripple price forecast are accurate, we believe that capital seeking 100-fold returns as well as capital seeking ‘low risk high rewards’ opportunities (institutions) will primarily flow to Ripple’s XRP token.
Stated differently, the ‘crypto frenziness’ that we saw in the past will likely continue, though in a different way, certainly more isolated.
While Bitcoin saw massive inflow of capital in 2016 and 2017, only to trickle down to larger altcoins and then smaller altcoins, we believe the dynamics are changing. A small number of crypto projects that deliver real value will be the winners, and eventually the winner-takes-it-all will be the dominant trend.
In sum, one of the most obvious beneficiaries of Bitcoin’s futures introduction will be Ripple’s XRP token.