Will The futures market do to Bitcoin what it did to gold?
By now you have heard the news — Bitcoin futures are launching this December, bringing in a wave of institutional money. Futures add an air of legitimacy the cryptocurrency space — a space many have considered to nothing more than a bubble or passing fad.
But the big question everyone is wondering is : What will futures do to the price of Bitcoin?
(P.S. If you don’t yet know what futures are, check out my other article “The 5 minute guide to Bitcoin Futures”)
The general feeling in the air is one of euphoria — with futures comes a wave of institutional money that should be good for Bitcoin right?
Well, maybe…but let’s back up a bit.
Two Opposing Views of Bitcoin.
There are two main camps in the Bitcoin universe: In my head I call them “The Believers” and “The Skeptics”. The believers see Bitcoin as a revolution that will change the way we interact, not just with money, but with each other and the world.
From the Crypto Anarchist Manifesto:
So too will cryptologic methods fundamentally alter the nature of corporations and of government interference in economic transactions. Combined with emerging information markets, crypto anarchy will create a liquid market for any and all material which can be put into words and pictures.
(I for the record, am a believer.)
The skeptics, on the other hand, see Bitcoin as essentially valueless. Tulips, economic bubbles and the south sea are often used to dismiss the potential of Bitcoin.
Side note: Speculative bubbles exist for world changing technology too. They are often the instigating spark that puts the tech on the map buy capturing the world’s attention. Witness the Amazon bubble, for example. For a great explanation of this, see this article by https://medium.com/@zemacedo
What does this have to do with futures?
Untill now, the only way the skeptics could influence the market was by refusing to participate. But with the arrival of futures, skeptics can now put their money where their mouth is — and actively bet against Bitcoin.
One camp sees Bitcoin as having near unlimited value — the other sees is as essentially worthless. They both can’t win…
But wait, there is more.
Another group is coming to the party — The institutional investors. And they love to crash parties.
Take this tweet from long time FOREX trader @Crypto_Ed_NL:
The implication is that large institutional players will want to suppress the price first, so they can accumulate Bitcoin at a discount. It wouldn’t be the first time institutions were suspected of price manipulation:
So to sumerize, we have three groups in this battle for the future of Bitcoin:
The believers — War cry “Hodl”
The skeptics - War cry “But, but…Tulips!”
The institutions — War cry “We want your cheap Bitcoins now so we can sell them back to you later at a markup.”
Who will win?
I would be lying If I said anybody knows. All we know is we are entering a new era of price discovery, one where institutions trading Bitcoin without ever having to buy the underlying asset get to bet against us if they want.
While we can’t predict the future, we can look at the past.
History does not repeat itself, but it does rhyme.
If only there were some other type of rare asset, one that had to be “mined”. One that people turn to to hedge agains a falling dollar? One that has an active futures market?
Enter — precious metals.
I have been continuously amazed at the similarity of the Bitcoin chart to early 1970’s gold prices. If I scale the Bitcoin price (slow it down by 4.3x speed shrink it by a factor of 60), and overlay it with the gold chart, this is what I see:
Not only are the major swings the same, but even some of the minor dips are repeated at the same place on both charts. Stare at that for a while and wonder!
Either the universe truly is one big fractal, or someone has been using the gold chart as a playbook. (Or both..)
The chart above extends until Dec 31 1974 — the day gold futures were launched.
Don’t you want to see what happens next?
Patience, we need to look at silver first…
Before we look at gold, lets look at silver:
I want to address the question — does market manipulation exist on a large scale?
Yes, I believe it does.
The most famous case of futures market manipulation was the cornering of the silver market by the Hunt brothers in the 1980’s. It is well know that the Hunt Brothers invested heavily in both silver and silver futures contracts in their attempt to corner the silver marker — eventually controlling 2/3 of the silver market and driving the price up 700+%.
The Hunt brothers had borrowed heavily to fund their silver purchases, but when the US government altered lending laws, the Hunt brothers we unable to buy more silver futures on margin. The price began to decline and the Hunt brothers were unable to meet their margin obligation — setting off a panic that caused the price of silver to fall from $48 down to $11 dollars in just 5 months. Ouch.
But wait — does that curve look familiar to anyone? If you have been in crypto-currency for more than a second, you will no doubt recognize the pump/crash cycle that characterizes so many crypto-currencies.
Just look at the Etherium/Bitcoin chart:
Or $DOGE coin — the infamous meme coin that financed the Jamaican Bobsled team:
Note: Doge was famously pump and dumped by a psudonymous trader named Wolong — who later wrote the so called “God PDF” documenting his strategies for manipulating the price of Doge.
Finally, look at Bitcoin Cash:
So by now you may be wondering “What’s the point of all of this?”
We can say that the crypto markets display the same behavior pattern as a the cornered silver market.
Is it a natural fractal that all assets with limited supply play out over and over, or is it price manipulation by powerful interests controlling the markets?
The answer is: probably both — human nature is fractal too.
Now Back to Gold.
Remember the chart I showed above comparing gold to bitcoin?
In 1974 the first gold futures contract was traded on the COMEX exchange in New York. Trading started on December 31.
Look what happened next…
The initial reaction wasn’t pretty — a nearly 50% drop in price over 2 years. Can we say for sure that this was caused by the futures market? No — but it sure is interesting the gold had an all time high the day before futures trading began — a price which wasn’t seen again for 3 and 1/2 years.
Since I sped up the Bitcoin timescale to overlay it with gold, the gold bear market of the late 70’s is equivalent to about 4 months in “Bitcoin time”.
After the bear market ended a new uptrend started. Zooming out to now, we can see what happens next — two more complete market cycles brough the price of gold to a nearly 10x increase from the all time high the day before futures were launched.
So what can we expect from Bitcoin?
I wouldn’t expect the Bitcoin trend to follow the gold trend exactly, but if it did, we would see a large drop that would bottom out in about April 2018 (remember, Bitcoin is moving at 4.3X Speed). Followed by an eventual rise to $60k — $80k before another major pull back, with a final run up to $180k.
However, there are several difference between the Bitcoin market now and the gold market in 1974, three especially come to mind.
1: The velocity of information is orders of magnitude faster — I doubt most market participants in 1975 even knew that gold futures were a thing.
2: The Demand to hold is bitcoin is one of the highest of any assets ever — Bitcoiners have learned to buy the dip and hodl.
3: Bitcoin has more competitors than gold. And any underlying flaw that gets discovered in bitcoin (Quantum Computing for example — could change the situation dramatically.)
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