CME Futures, Herd & Volatile Crypto Winter
Bitcoin $10k! For those of us who have been in crypto for some time, such a headline was something we all somehow expected to happen sooner than later toward the end of this year. I didn’t think it would happen before December, but crypto has proven me wrong many times.
Bitcoin’s price surge is partially associated with the listing of bitcoin futures by the well-known U.S. commodity exchange CBOE. This will be the first time large institutional players will be able to expose their portfolio to cryptocurrencies in the traditional way: by buying them on traditional exchanges where liquidity is much higher than what we are used to in crypto. If you think the $5 billion USD daily volume in Bitcoin is a huge number, wait for the big players to come.
The other argument for bitcoin growth is the failed attempt to “attack” it by trying to introduce and implement the so-called SegWit2x standard. With every failed attempt to introduce a new version of Bitcoin as a new standard, the established Bitcoin gains resilience. To many it seemed that this battle would make bitcoin lose its dominance over other cryptocurrencies such as Ethereum, but the situation proved otherwise. Personally, I think the “initial fork offerings” we have witnessed in the last few months have shown that bitcoin cannot be easily overtaken and that its governance is well distributed. Miners tried with Bitcoin Cash, payment processors/exchanges tried with SegWit2x, but it seems the power is still well balanced and partially in the hands of core developers and a community that believes the security of Bitcoin is more important than transaction throughput. Or, to put it another way, bitcoin as digital gold serving a store of value function is currently a better utilization of blockchain technology than bitcoin as a payment currency.
Although Bitcoin has showed resilience, it has also behaved as a yielding asset adding free dividends to holders. Every attacker trying to introduce a Bitcoin duplicate has rewarded bitcoin holders with free money. People soon recognized it makes sense just to hold Bitcoin, whatever the outcome.
So, here we are now, passing the $10k mark and having larger appetites again. Personally, I think we are reaching a point where we need to take a good look at what has happened in the last year and what the path is going forward.
Coming from traditional markets, I was always fascinated by how resilient and robust the crypto market is. In the last year, we have witnessed daily high double-digit percent growth, but what is more interesting is that we also had crashes — up to 30% in two days — but that the market rebounded and set new records only a week later. In traditional markets, such event after long lasting exponential growth would put them in panic mode, initiate a bear market, and erode investors’ confidence for months, if not years.
Why is this not the case in crypto? The answer is because a large fraction of crypto investors made a fortune a while ago and are not particularly risk-averse, including the fact that momentum of fresh money coming in hasn’t been brought to a halt. “Traditional” crypto investors made a fortune starting from a few thousand dollars, and they have thick skin when it comes to two-digit percent drops. Sure, they might have lost 30% net worth in a day, but they still have lots of money relative to their initial investment. And they are very attached to crypto, being true believers in decentralized currencies and not very eager to leave this behind just to make money.
Another important determinant pushing prices up or not allowing them to fall are the specifics of storing crypto assets. Keep in mind that every time someone performs a transfer of crypto to fiat, they have to send crypto to an exchange, which can be a complicated task. First, there is accessing cold storage, then there is the migration of assets to the exchange, and then you have to make a trade to fiat money and either store the fiat on an exchange you don’t particularly trust or send it to your bank account, where you may have to report it to a tax authority, depending on your jurisdiction. Perhaps you don’t want to send it to a bank account because you might go back into crypto again in a few days when assets rebound.
But we all know a wider crowd is now coming “to the game” as well. This involves people who know nothing about technology and are here only to make a few bucks, especially since the growth hasn’t been particularly stunning in traditional markets in the last few years and their friends joining crypto before them made 2x returns in few weeks. The important thing is that these guys are putting in their earned money, and their behavior will be much different when they see a 20% and beyond drop in one day. Moreover, smaller retail investors are keeping their funds on exchanges and can convert to fiat much quicker and more easily. Once market shock occurs they will run for the exit into fiat, creating a huge liquidity crunch on exchanges that we haven’t seen before and that will create headaches for the exchanges who exchange crypto for fiat and which are not that many in reality. In such a scenario we might also see problems arise that were previously hidden, such as broke exchanges. Keep in mind that when the flows turn, many vulnerabilities are suddenly exposed. This just creates another round of panic selling and erosion in investors’ confidence.
Another major factor for my cautious view going forward in the next month or so is actually the CME Bitcoin futures listing. Although long-term I think this will bring recognition to cryptocurrencies if Wall Street gets involved and is a positive for future development, it might in the short term actually stop this bull run. This is because for the first time people will be able to short Bitcoin in larger sums. If you think it doesn’t make sense to do that, let’s wait and see. There are entities such as miners, who are totally profit-oriented and need to cover their bills at the end of the month and hence might hedge their Bitcoin-denominated income and short it. To me it’s simple: once you have a possibility of shorting a currency to a large degree, you create much more balance between believers and haters. The latter weren’t really present on markets until now.
Wall Street knows it is coming a bit late into this game in relation to the current bull run, and if I were them I would probably wait for the first crash to come and then go in or, even better, with some clever tactic go short before the crash occurs or try to actually influence the crash.
All this means we might have very volatile cryptocurrency market ahead of us. This might also be the time when we try to make some sense out of the latest cryptocurrency euphoria. In the last year, about $200 billion USD of cryptocurrency value was created, and I don’t see many things fundamentally changed regarding the development of underlying protocols of currencies or tokens. What has changed significantly, on the other hand, is the number of new investors. On Coinbase there are 50,000 new user accounts opened every day or more than a million per month. Although this can help faster adoption of cryptocurrencies in the long term I’d much more prefer to see a higher number of developers getting involved in development of tools and technology for currencies being adopted faster. It will probably take some time, and in the meantime we might go through waves of crashes initiated by either Wall Street market shorting or retail herd panicking at every market drop.
