Could the tiny amount of un-faked trading volume really control Bitcoin? It’s tough to believe so. Bitcoin as of 2nd April 2019 has a market cap of $87 billion and trusted exchange volume from OMC is almost $2.1 billion. That isn’t even 3% of the total market, so how does that justify the 20% jump in price that happened?
Well, spot markets are not all that efficient for any asset. Genuine price discovery is unlocked via derivatives (futures, options, and swaps). The same can be said for Bitcoin. The real driver of Bitcoin’s price is the futures market. To be precise, it’s the CME Bitcoin Futures.
Futures Products and Their Effects
CME is the ‘Chicago Mercantile Exchange’. It is an American financial institutions that facilitates trading of derivative products. Most of the volume comes from currency and commodity futures. However, in December 2017, CME as well as CBoE (Chicago Board Options Exchange) launched futures and options for Bitcoin. It is widely believed that this is what caused such a rapid burst of the bubble that Bitcoin was in. It can be argued that these futures were simply helping with efficient price discovery. In the midst of a run of exuberance, the CME futures helped bring price down to reasonable levels.
On February 22, 2019, CME Bitcoin futures volume surged past 18,000 contracts, the highest it ever was. At the price at the time, it was roughly $360 million worth of exchanged volume. On February 23, Bitcoin surged 4.3%. On February 24, Bitcoin fell by 9.2%. This was the choppiest (extremely volatile) price action the market saw in months. But this isn’t the only incident.
CME futures for Bitcoin expire on the last Friday of the month. If you look back to Jan 2018, you’ll see the most volatile day of the month is always the day after futures expiration.
The Effects of Futures Volatility
CME futures expiration has not always had a huge effect on the market. In certain months it has, while in others it didn’t have enough volume to significantly move the market. In December, expiration was followed by a price increase of 8.4%. But in most other months, futures volume was insignificant and it didn’t lead to a major market move. The inference from this is that months with high futures volume see volatility on the day of expiration and the day after as well. Months with dismissible volume in CME futures didn’t see much or any volatility after expiration. There’s a clear link here. The CME futures do in fact push price, but we need to see if they have enough volume to push the market in the first place. The issue is that we can’t be sure if the market will go up or down because that is up to the P&L of contracts.
Another aspect of the volatility is the psychological role it plays. Volatility is an exchanges best friend. For a trader, volatility is either a sweet dream or their worst nightmare. One day of volatility can turn a trader into a millionaire; it can also destroy someone with poor risk management. Volatility can turn the most logical trader into a careless, greedy person. Most people lose money in choppy markets. It’s when price action is sustainable yet robust that the best trades occur.
For Bitcoin, most large moves in one direction are followed by a large move in the opposite direction. Cryptocurrency is much more behaviorally driven than traditional asset classes. The fear within various market participants is clearly depicted in the charts. The term ‘FOMO’ may have existed before, but was popularized because of Bitcoin. The manipulation induces fear.
Working Past Volatility and Price
Correlation between CME volume and Bitcoin’s volatility are uncanny. The months in which volume was negligible were the months Bitcoin hardly moved. For any cryptocurrency investor or trader, keeping an eye on CME volume is essential. In fact, as I earlier mentioned, the Bitcoin bubble burst just a month after CME listed Bitcoin futures. Understanding that this volatility is innate is a necessity. Bitcoin isn’t like any other asset we’ve encountered so we cannot use the market frameworks for it.
This is such an easy thing to say but so incredibly difficult to implement. The markets will continue to be volatile for quite some time. It isn’t something that will disappear overnight. In fact, we should ideally be prepared for it to never stop. This is why development of portfolio backed stablecoins like Reserve Protocol are important to the ecosystem. Gold developed its reputation as a store of value after years of proving itself to be one. Bitcoin doesn’t become a store of value just because we want it to be one.
In a society where fiat is no longer dominant, volatility would cease to exist. Rather, Bitcoin may stop being volatile as it becomes the USD (in the sense that everything else will be pegged to it). But more on that later this week.
- AB
ReverseAcid Monthly Recap
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- ReverseAcid Monthly Recap - December 2018 (Vol 2)
- ReverseAcid Monthly Recap - January 2019 (Vol 3)
- ReverseAcid Monthly Recap - March 2019 (Volume 4)
Crypto Analysis Series
- Part 1 - Basic Attention Token and How It's Revolutionizing the Internet
- Part 2 - Golem Network Token as a Potential Giant Killer
- Part 3 - Augur and the Future of Decentralized Predictions Markets
- Part 4 - Dogecoin - Such Meme, Much Value
- Part 5 - Zilliqa
- Part 6 - IOTA
Previous Posts
- Two Men on an Island - An Introduction to Zero-Knowledge Proofs and What Follows (Part - 1)
- Why Unveiling Fake Volume is Essential for Market Growth
- Understanding the Difference Between an ‘Open-Community’ and ‘Closed-Network’ Blockchain
- Operational Difficulties in Running a Cryptocurrency Exchange
- Dharma Protocol: Tokenized Debt and Funding Through Decentralized Systems
- Should Cryptocurrency Wallets be Registered with Government Authorities
- Venezuelan Economic Crisis: An Outsider's Perspective
- Barriers to Stablecoin Adoption: Detaching from the Traditional Notion of Markets
- Why Bitcoin Proves Markets Function on Behavior
- 2 Key Areas Zilliqa Identified Weakness in the Ethereum Protocol and Improved It
- Ujo as a Platform for Music Revamping - An Innovation Review
- Transforming Real Estate Investment on the Blockchain
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Dear @reverseacid
Thank you for sharing this link with me buddy. Nice follow up to your previous publication.
I remember, there was a lot of talks about "futures" at the beginning of 2018 and I was full of hopes and dreams around that time.
I never heard about futures before and from my understanding it is a tool that allows us to bet on price of major assets in the specified future. Am I right?
Indeed. I've heard many reasons that pointed out beginning of 2018 crash towards futures, as big players seem to "bet via futures" that around that time price of BTC will be at very low levels. And if market makers want to crash such a small market, then naturally nothing can stop them. Especially within market which is fully unregulated and doesnt give any sort of protection to investors.
Great read buddy,
Piotr
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Basically yes
A future helps us take a position to bet on where an assets price will be in the future.
Market makers control crypto more than any other asset class as it is so small and hence easy to control. You hit the nail on the head.
Thanks for the great comment and your neverending support @crypto.piotr
People like you motivate us to get better and keep moving forward
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Hi, apparently we are not familiar. Thank you for supporting my work. The article unfortunately completely can not read now. However, I will help you by placing it on my page.
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Hi @reverseacid Actually I don't really understand Btc graphics, but I am very sure that in the future Btc will be virtual money
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thanks for sharing.
I don't know Futures.
But when I trade on many exchanges,
Often see fake trading messages.
Many exchanges have brush the exchange Quantity.
I really don’t know them to be affected by Futures!
Thank you for your article
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Yes @cloudblade
Many exchanges turn a blind eye because the manipulative spikes increase their revenue through fees. They have no accountability to regulators so they don't care yet.
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Hi @reverseacid, Thanks for pointing out the link between the Bitcoin Futures market and Bitcoin price actions.
What do you think the effect would be when Bitcoin ETF is approved by the US SEC? Would the ETF overshadow the Futures?
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Hi @devann
Thanks for the comment. I believe the ETF is a real negative for Bitcoin as a decentralized system. The problem is that it encourages people to treat it as another form of equity rather than peer to peer cash.
The point of Bitcoin is to override censorship by holding our own assets. An ETF just implements the same for all custody process we see for equities and large scale real estate investments.
While the market will factor it as a negative, I believe it could spell the end of Bitcoin as a P2P payment protocol.
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Didn't think about it this way.
Well you make sense given the 21 million limited total supply of BTC. Would you still maintain the same stance if we are discussing, say, XLM ETF, which has a total supply of more than 100 billion(including inflation)?
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Definitely. I think the point of decentralized currency and token is for us to be our own custodians.
An ETF renders it merely an investment where as it should be treated as both an investment and a currency.
XLM, ZIL, XRP, etc; all of these high supply coins are designed as payment protocols so there are enough to have a working economy. By pushing these into ETF's, trusts, and third party custodians, we are destroying the very purpose for which they are created.
Of course, this is my opinion and it is somewhat purist. I'm sure many people would not agree to the points I've put forth @devann
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Also just recently noticed you have been sharing a few articles of ours on twitter @devann
Immensely grateful for your support and glad you find the content useful. Thanks for the everlasting motivation and insightful comments.
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I share share-worthy articles from anyone, whenever possible, on one or more of my twitter accounts, but mainly in my personal twitter account and the investment twitter account, @invest_country.
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Thank you @reverseacid for sharing your link..
Great to know about the progress of BTC by CME and CBoE...that, hopefully can speed up the pace of crptocurrency and farther more improvisation.
thanks
jeoleena.
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It is more for speculation than a development tool @jeoleena
But it helps with efficient price discovery
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Hi @reverseacid. Thanks for making me aware of the post.
The traditional markets are built on derivatives. And, as such are highly manipulated regardless of the amount of actual commodity in play.
While I would agree that there is definitely a relationship between these types of markets and price, it is not a positive one. If you look at the over-manipulated silver and gold markets, you can easily see that the price actions benefit the manipulators, not the market in general.
Many think the markets will crash at some point. That would be catastrophic. So, I'm thinking we must put up with these markets, but we must be very careful.
Thanks again for the heads up.
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Very true @guysellars
Another way to see it is that derivatives aid price discovery. The perceived value changes so much, it always reflects the mean of investor value.
That being said, they do have huge drawbacks. But I believe they are useful tools when not used solely to disrupt the market
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A good one lad!
Kudos to you..
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Hi @reverseacid
Thanks for sending memo.
I have gone through the whole post and understand about CME and CBOE. I don't have that much technical knowledge that why this CME contract expires. Infact I hear this expiration new after every couple of months and most of the time its adviced not to trade beacuse Bitcoin prices will be highly fluctuated this time.
About CBoE don't know much how it works but little bit understand through this post.
Thanks much for sharing useful information dear friend.
Have a great weekend..
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Hi @alokkumar121
The reason it expires is because it's like a calculated bet. Think of it like betting against your friend that a certain event will happen by the end of the month. If it happens, you make money, if it doesn't, you lose. At the start of the next month, you can enter a fresh new bet.
Crypto markets are very volatile. Don't trade them unless you are willing to take a lot of financial risk and have studied the markets for at least a year
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Thank you for sharing your blog.and also thank you very much for your kind and generous gift.it is appreciated 😊
Athena ❤️
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Thanks for your kind words @orginalathena
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@reverseacid, In my opinion sometimes the market trends behave weirdly and the true reason of uptrend and downtrend hides in hidden aspects.
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You are correct @chireerocks
Because the information flow is not the same to all participants, insiders and this with strong networks can take advantage of this and take positions before data or news reaches the rest of the market.
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That's true.
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Hi @reverseacid.
This is an analysis that handles highly technical aspects. Show that you have great knowledge.
What is the effective time for a future product?
You tell us that in 2017 there were launches:
Is it then two years after these releases when you feel the positive effect?
Or is this rebound in BTC prices due to the new Futures releases that were made in 2019?
Yours, Juan.
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Hi @juanmolina
Thank you for kind words, my friend.
A futures product usually expires on the last Friday of each month. So the April 2019 futures will expire on the 26th of this month. If you know BitMex, that is a perpetual contract, meaning it never expires. When you take futures, there are several added pricing factors due to the expiry. There is something called "time decay" which gets factored in but it's detailed so I won't get into that.
My opinion is that the futures have helped with price discovery but also have helped manipulate price. I have no firm opinion yet as I need some more data to form my opinion.
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I'm sure we'll all share your next analysis.
Thank you for being so attentive.
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There are many concepts I don't know. Which I had to find out in order to understand your post (Futures, Market maker, volatility, liquidity, among others).
As far as I understood Futures affect the price of Bitcoin, but only at the time they are created or expired (At the end of the month as you have indicated).
I do not understand this phrase, not all assets, included crypto, are propelled because of their behavior?
Thank you for letting me know another reason that affects the volatility of Bitcoin.
I'll keep in touch
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I think that one of the fears of people- especially those who does not understand price corrections and are confined into the daily trade prices and the past prices is that, like any other stock, BTC self regulates itself.
Yes. I did had my doubting thomas moments but looking at the big picture now, I think its absurb to think that BTC would just poof/disappear in a week or so. I am sure everyone out there have a crypto in a way or another and, they will come to its rescue if they see it being threatened big time.
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