I’m a previous article I explained the concept of futures trading and the impact it could have on crypto markets.
Will futures trading provide the next leg up in the Bitcoin price rally? The answer is yes!
One of the major headlines of the time, and one that still gets some traction on crypto news services today, is that futures will allow professional wall street traders to bet against Bitcoin and this has the potential to unleash a wave of selling that would dramatically reduce the price of Bitcoin. These stories, while good for a headline, demonstrate a basic failure to understand how futures contracts work.
To put it simply, Bitcoins futures do not allow traders to short Bitcoin. Or more correctly, they do allow it, but not on terms any sensible trader would accept.
Investopedia defines short selling as follows:
Short selling is the sale of a security that is not owned by the
seller or that the seller has borrowed. Short selling is motivated by the belief that a security's price will decline, enabling it to be bought back at a lower price to make a profit. Short selling may be prompted by speculation, or by the desire to hedge the downside risk of a long position
So in a nutshell, if you think he price of an asset is going to fall, you can sell it now, and then buy it back later at a lower price. Your profit is the difference in price. Futures contracts offer one way to short assets that you think may fall in value.
My original article on Bitcoin futures outlined that one of the primary obstacles to institutional investing in Bitcoin was volatility. Professional money managers operate under strict guidelines about how much risk they can accept with their client’s money. On the buy side, futures contracts allow institutions to hedge their exposure to Bitcoin volatility. So they can both buy the crypto asset and lock in a future price that they will receive for this asset, thus minimising their downside risk. This ability to minimise potential losses makes Bitcoin a much more attractive investment option for a trader with an inclination to include crypto assets in their portfolio.
Technically, futures also work for short selling, but not on terms a professional trader would willingly accept. Once again the problem is volatility. With price swings in crypto prices of 20-30% in a single day being common, the risk involved in short selling is too great. This is exacerbated by the other often misunderstood fact about short selling, which is that your losses are unlimited. There is no cap on how high the price of Bitcoin can appreciate to, so therefore no limit to how much you can potentially lose. If you buy a Bitcoin for $10,000 and the price goes to zero, the most you can lose is your initial investment. If you put a contract in place to sell a Bitcoin for $10,000 and the price triples to $30,000, you are out of pocket by $20,000, or twice your initial investment. If the price goes higher then you can lose even more. Smart traders have strategies to limit these losses, but the volatility currently inherent in Bitcoin markets, makes it a uniquely unattractive investment for all but the most aggressive traders. Many wall street professionals may indeed wish they could short sell Bitcoin, but futures contracts are not an appropriate vehicle to allow them to do this.
There are other financial instruments that are much more suitable for the shorting of an asset, but these are not yet available on large enough scales to influence the broader Bitcoin market.
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Some similarity seems to be present here:
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I think another coin that should be gaining interest is XEM. Its value has risen in the past week from like $.20 to $1.00 USD. And that is a big rise.
So I looked into it and XEM is a coin representing the NEM Distributed Ledge Blockchain. I think its revolutionary and can provide a better use of blockchain for everything and not just coins. Please take a look at my blog about it and share with me your thoughts. Please follow me if interested.
https://steemit.com/nem/@yomaicoin/nem-distributed-ledger-blockchain-technology-the-new-money-maker
You have been voted up! Happy New Year!
Hi @yomaicoin,
Thanks for taking the time to read my article. I have heard a lot about NEM, but I haven't had a chance to look into it in detail. I'll check out your post and let you know what I think!
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