The Why's and What's of Bitcoin 20K - the Fed explains

TGIF traders and investors! It seems as it barely was Friday and now it's Friday again. Before you kick your feet up and open a cold one, there is still time for a short post.

Remember that time last year when we didn't have proper Bitcoin futures trading yet for investors? I remember it as clear as day, people falling into two categories - one group said that Bitcoin futures introduction will make the price skyrocket even more, the other group said that now Wall Street will destroy Bitcoin.

I didnt have big investments in Bitcoin, but i held others, and other cryptos depend on Bitcoin quite a bit, perhaps a bit less now than at the time then. But as the dates of launching Bitcoin futures (both CBOE and CME) rolled closer, i remember myself often pondering, whether to get out of my positions or add to them. We all want easy money - the easier the better. I tried to anticipate the upcoming moves, changing my mind about what would happen at least a dozen times.

I decided not to hold any major crypto at that time, except Steem Power and Buildteam tokens and as it turned out, it was a good move - i had the chance to buy some of them much lower. I never bought the lowest of bottoms and i never bought the amount that i wanted as one almost never has enough spare funds to cough out at the right price.

Lets jump back in time to the early 2010's for a second.

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Years ago, when making my first steps in trading on the foreign exchange (forex), i was often left with bare hands, my positions forcefully closed by a Stop Loss or a margin call, with rapid swing moves coming out of nowhere and wrecking havoc in traders' accounts.

It was just a bit later, when i learned about the traders friend, the economic calendar, central bank events - rate decisions, speeches etc. I always wanted to look behind a move, what caused it, behind 'who said what' to cause that spike or look for reasons of a price crash. I remember some veteran traders, who i still look up to, telling me not to look for reasons, as traders just need to react. What happened - happened. You react, no need for reasons.

I disagree. Knowing what causes certain moves can teach you a lot and prepare you for your future trading, knowing how certain events might influence the markets. We are not all fundamental specialists, economic analysts (even they are often wrong), so all we can do is learn from past events. The scenarios are not always the same, but looking behind the curtain gives you valuable insight of the market mechanics.

So now here we are at the Bitcoin futures again.

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San Francisco Federal Reserve are our with a research paper, where they take a look at what caused the Bitcoin topping around 20K and the subsequent fall. They conclude it was the introduction of Bitcoin futures on the CME (Chicago Mercantile Exchange). Note that investors could already trade Bitcoin futs on the CBOE for a week, yet the trading volumes there hadnt yet picked up there at the time.

As the skeptic whale investors had no proper way of shorting Bitcoin before the futures, only own and HODL for long positions (you can bet they werent trading on Bittrex :)), the shorting opportunity via CME futures made many a investor happy. Well, can you call a guy an investor if you enter the cryptocurrency market as a partycrasher and short the hell out of it? Depends. Anyway, the short-term bubble had to correct due to extreme sentiment from powerful investors and CME, in retrospect was the key that made that possible.

San Francisco Fed also notes that this kind of correction is often seen in the past as well, during various historical bubbles, the mortgage bubble and others and coincides with the introduction of futures trading of an asset class - nothing new in this world.

Is this knowledge valuable in retrospect? Who knows. Perhaps some of us are in a similar situation in a few years and maybe we remember December 2017? Perhaps. Only time will tell.

Materials:

frbsf.org/economic-research
investopedia.com
hacked.com

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