The introduction of bitcoin futures contracts to major American exchanges like the CME has been broadly seen as an institutional vote of confidence for the cryptocurrency, a move to the financial mainstream which has helped propel 2017’s extraordinary price rises. However, there are signs that the institutional investors the exchanges hope to attract will be betting that bitcoin prices fall dramatically.
So far the bitcoin sceptics have had to content themselves with warning everyone that the market is a bubble but it has been difficult for them to trade against bitcoin. The cash market is by nature bullish – people buy because they either want to use bitcoin or they expect its value to increase. Though short-selling is possible, it is complicated.
Futures Markets and Short-selling
The introduction of futures markets will change all that. Participants in futures markets can effectively sell before they buy, promising to make delivery of an asset at one price then later promising to taking delivery of that asset. Each trade cancels out the other, so no asset is exchanged. However, if the trades were made at different prices the trader will have made or lost money on the price difference. In a cash market you make money when the prices are rising. In a futures market you can make money whichever way prices are moving, provided you predicted the movement.
With the CME and Cboe Global Markets launching futures contracts before the end of the year, and the Nasdaq rumoured to be not far behind, the bitcoin sceptics can finally bet on falling prices. Though hedge funds have been coming into the cryptocurrency space in 2017 it seems that this is just the beginning.
Luke Ellis, the CEO of British hedge fund Man Group, told Reuters this week that though cryptocurrencies were interesting they were inappropriate for Man group investment. However, futures contracts would change that. He said that bitcoin was,
not part of our investment universe today – it could be. If there is a CME future on bitcoin, it would be.”