Cutting Through the FUD Part VI — Derivatives will Suppress BTC’s Post Halving Price Impact
It’s amusing to see one theory after another being propagated by experts to explain the apparent weakness in BTC price. The latest one suggests BTC won’t go up post halving as a more robust derivatives market means people would rather trade the derivative than the underlier.
Myth #1: “because BTC is a digital commodity, it will behave the same way as other commodities where the prevalence of derivatives means that producers can no longer set prices”.
This argument is flawed on a few grounds. a) Commodity producers didn’t lose the ability to set prices because of derivatives. They lost pricing power due to competition from other producers. b) unlike commodity cartels (think OPEC), BTC miners don’t have the ability to dictate or set prices because they don’t control supply. BTC supply is controlled by code — 12.5 BTC still gets produced roughly every 10 mins even if half of the miners decide to stop mining. That is not to say that miners can’t impact the price of BTC near term. They can through the pace of their selling affect near term BTC prices, but they are still price takers nonetheless ie. the faster they sell, the lower the price they realize.
Myth #2: “there is a new speculative market for BTC enabled by derivatives due to entry of bigger players like CME and others, in addition to Bitmex”.
This is not true. Bitmex already had a dominant share of BTC trading in 2016–17, yet BTC prices still rose sharply after the last supply halving in July 2016. Other new entrants such as the CME Group and Bakkt (a subsidiary of the Intercontinental Exchange) have not added significantly to volumes, their size notwithstanding, although derivatives share of total trading volume has risen.
Myth #3: “the more Bitcoin becomes an investable asset, the more it’s price becomes decoupled from its value and its demand and supply.”
This is not true. Oil and other commodities already had developed derivatives markets, but this did not stop many of these commodities from rising more than 10X during the last commodity cycle from 2002–2007 when China demand outstripped global supply. Derivatives trading deepens the liquidity of an asset and facilitates price discovery, but it does not change the underlying demand-supply balance of the commodity. If OPEC cuts oil production by half tomorrow, the oil price will spike even though spot trading is only 1/30 of derivatives volumes.
Myth #4: derivatives have capped the price of gold and will do the same to BTC.
Gold is a mature asset and trusted Store of Value (SoV) as it retains value well especially during a financial crisis. The fact that it is not very volatile plays to its role as a SoV. It has over 2000 years of legacy and is >$7T in market value. BTC is 10 years old with a market value of only $130B.
BTC is an emerging SoV with a volatility and supply profile that is also very different to that of Gold. Gold’s market value rose from $2.3T in 1980 to $7.3T today. In the prior 30 years, its market value rose from ~$81B in 1950 to $2T in 1980 (25X!) From 1850 (start of industrial gold production) to 1950, only 1/3 of mineable gold was produced. The other 2/3 came in the last 70 years. Experts agree that 80–90% of all gold has been mined. In 10+ years of existence, more than 85% of BTC has been mined. Hence, the two assets are not directly comparable but given BTC’s shorter history and supply profile, it’s volatility should be higher and it has significantly more upside to market value if it is adopted more widely as a SoV.
BTC’s price will ultimately still be driven by its underlying supply and demand outlook as with any commodity. The price path post halving is still dependent on a strong demand outlook, but the halving helps by sharply constraining the incremental supply of BTC.
Bottomline: There are derivatives for many commodities like oil, metals, agriculture etc. Nonetheless, the prices of the underlying commodities are still influenced by real world factors (such as war, weather, economic activity etc.) that affect their supply and demand balance.
