The world of cryptocurrencies continues to evolve and with it comes news of the launch of Bitcoin futures.
The CME Group announced last month that it will be launching Bitcoin futures based on the CME CF Bitcoin Reference Rate (“BRR”). It is anticipated that the launch date will be on 10th December of this year.
News of the launch, by CME Group, has garnered plenty of attention and has contributed to some particularly hawkish price forecasts for Bitcoin, with the talk of Bitcoin hitting $10,000 before the end of the year doing the rounds.
With the launch of Bitcoin futures, expectations are for a sizeable increase in demand for Bitcoin, with institutional money waiting for CME Group’s launch estimated to be in the tens of billions of Dollars. When considering some of the hedge fund names ready to move into Bitcoin on 10th December, the near-term outlook certainly looks promising.
Will 10,000 be Just Another Number?
Bitcoin has had a spectacular run this year when considering the fact that it was sitting back at sub-$1,000 levels at the end of last year. As new investors continue to enter the cryptomarket, the sizeable returns on offer have yet to leave investors looking for daily or weekly returns. Focus continues to remain on the actual value of Bitcoin itself rather than by how much the cryptocurrency has moved on a given day or week.
In the more traditional financial markets and mature asset classes, attention on value tends to be limited to forecasts rather than the daily or weekly moves. Even with the Dow Jones, talk of breaking through 20,000 had made the headlines in the wake of Donald Trump’s surprise election victory. Once the Dow broke through to 23,000 levels, the focus has returned to the percentage movements rather than the actual value of the index itself.
We will expect Bitcoin’s value to eventually be treated in a similar manner, but it’s going to take some time. It’s the speculation of how much further Bitcoin has to run that continues to draw in new investors, which has ultimately lead to the CME Group launching Bitcoin futures for institutional investors. Once the exponential gains come to an end and Bitcoin matures as an asset class, the underlying value may well become less meaningful to the vast majority.
There will be the fortunate minority, however, who invested in Bitcoin in the early days and have had the nerve to hold on. To them, $10,000 would be far more than just a number. Investing back in late 2011, you would have been paying under $10 for a Bitcoin, so you can only imagine the feeling of seeing it rally to $10,000 if the projections turn out to be accurate.
Could CME Futures be the Trigger for Bitcoin Crash?
Some will consider the creation of the Bitcoin futures market as a positive for Bitcoin and its medium to long-term outlook. When we look at the behavior of global equity markets today, there are some distinct differences between indexes that are largely comprised of retail investors and those that are more biased towards institutional investors.
Two indexes that spring to mind are the Dow Jones Industrial Average and China’s CSI300. Institutional investors on the Dow make up more than 70%, whilst the CSI300 has seen institutional investors account for around 30%, the rest made up of retail investors.
When looking at China’s CSI300, the lower percentage of institutional investors leaves the index exposed to herd mentality investments that can lead to significantly more wild swings in value. We have seen Bitcoin experience particularly sizeable swings in both directions as a result of investor sentiment and to some degree, the herd mentality of investors that continues to drive Bitcoin to record levels.
Incoming institutional investors by way of the CME Group’s Bitcoin futures will be considered a far more stable investor group, with institutional money considered far stickier than that of retail investors. To put it into perspective, a billion Dollar hedge fund is not going to invest today and sell tomorrow, unless market forces require it to do so, such as Bitcoin’s value falling through stop-loss limits. A 10% fall in Bitcoin could see a sizeable number of retail investors jump ship, however, with retail investors far more sensitive to negative news than the more investment savvy institutional investor who has a longer-term outlook on investments.
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While this will provide some support for Bitcoin over the near-term, as institutional investors that invest in fiat money begins to convert to Bitcoin, it doesn’t mean that the only way will be up for Bitcoin. Institutional investors also have to manage liquidity, just on a far grander scale. A negative outlook towards Bitcoin would see Bitcoin take a far greater hit should the institutional money come pouring out in the future. You can be sure that if institutional investors are pulling out of Bitcoin then retail investors that are still holding won’t be far behind.
Bitcoin’s market cap today is just under $140bn. There is undoubtedly some institutional money already in the game, but with more on its way next month, we will begin to see Bitcoin’s performance to be more akin to a Dow than a CSI. We will have to wait for the initial price rally driven by strong demand from the futures markets to pass, but it will come. When you hear of $100,000 Bitcoin price forecasts, such an outlook will be based on a significant increase in institutional investors. Its early days for Bitcoin and the crypto world, but with institutional investor money parked and waiting outside the Bitcoin door, this is the next step in Bitcoin’s evolution towards a more mature asset class.
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