If you’re a big follower of mainstream news, you may be led to believe that December 10 is D-day for bitcoin and other cryptocurrencies. On that date, the CBOE will open the floor to trading bitcoin futures. Currently, bitcoin prices and the entire “blockchain markets” are responding positively to the news. However, a growing chorus of both mainstream and alternative voices are urging caution.
The pessimistic argument is that bitcoin futures will dramatically alter the way cryptocurrencies are perceived and traded. Prior to the CBOE announcement, no practical forum for shorting bitcoins or other cryptocurrencies existed. Essentially, the blockchain markets were artificially saturated with bulls. The only “shorting” activity that occurred was selling a long position, and then (hopefully) picking up coins at a cheaper price, thus profiting from the differential.
Bitcoin futures changes that paradigm entirely. Now, traders can short the market in the traditional sense: borrow bitcoins/cryptocurrencies from a lender, immediately sell that position, and wait for the price to drop, allowing the position to be bought at discount to return to the lender, and profit from the price difference.
Theoretically, a bitcoin futures market also opens the door to less-than-scrupulous trading practices. For instance, what would the specter of naked short selling do to the prices of cryptocurrencies? A naked short is nearly identical to the short position. The difference, though, is that the short position occurs before the shares/units are borrowed, or even before confirmation that those shares/units can be borrowed!
With such exotic trading options finally open to interested parties, the fear is that bitcoin futures will entirely collapse the blockchain markets. Remember, what we saw is the power of the bulls; we have yet to see the power of the bears.
The only problem with this line of thinking is that we have seen the power of the bears. Each and every time bitcoin prices hit a milestone, many someones always send up the warning flag that the bubble is here. We saw it when bitcoin hit $100, then $500, then $1,000. We’ve been hearing bubble stories all the way up to $10,000, and beyond!
When will the naysayers get tired of repeating the same BS time and again?
More importantly, bitcoin futures are not guaranteed to sink bitcoin. This is a critical point that bears reminding. A healthy market involves both buyers and sellers. The addition of more buyers and sellers only improves the health of the market, not detract from it.
In that same logic, it’s an opportunity for bitcoin holders to kill the banks. Let me explain: if any financial institution is stupid enough to short bitcoin and the revolutionary blockchain technology, they may find short-term success. However, when the avalanche of buying activity inevitably comes rushing in, any short positions are liable to be blown up, and not in a good way.
Recall that the housing crisis culminated rapidly because the mortgage industry could not absorb all the bad bets they made. A similar occurrence could happen to the stupid few institutions that short bitcoin. They may enjoy a good run, but if they can’t cover their short bets (say, when bitcoin hits $40,000 or more), they will face financial ruin.
Sure, bitcoin futures will change the face of cryptocurrencies. Nevertheless, let’s remember that the sword cuts both ways.