Bitcoin has been getting a lot of attention from mass media since the launch of Bitcoin futures markets. Yet another futures trader, the CME group, is opening its doors to the cryptocurrency tomorrow Dec 18th by 4 p.m. (UTC+1).

Introducing futures to cryptocurrency seems like a new idea — but it is not. It has been existent in the crypto-world as well, just that contracts were not cash-settled in US $ before. What is new though is the possibility to trade Bitcoin as a commodity, without actually being in possession of it. No need of setting up a “techy” Bitcoin wallet. It is a step to ease of access to the profitable volatility for the old economy and institutional investors so to speak.

Could Bitcoin futures help limit volatility?

Regulators have been stepping down on Bitcoin and decided to treat it like a commodity; two proposed Bitcoin ETFs were rejected by the SEC in March of this year. Futures are financial contracts, obligating a buyer to purchase an asset at a given future price. This financial instrument was first invented for Chinese rice farmers ensuring a fair price for their next year’s harvest.

At this stage, the famous cryptocurrency mostly serves as a store of value, which due to its immaturity is also used as a speculative asset. Pretty contradictory, given that price should be stable in its first use case but volatility is wanted, if not necessary for speculation.

Leo Melamed CEO of CME Group states the following:

“[We] will regulate, make Bitcoin not wild, nor wilder. We’ll tame it into a regular type instrument of trade with rules.”

The corporation wants to implement a “hard cap” which will restrict price swings at a certain level for any day.

Will this limit Bitcoin’s volatility? In the short-term: No. Rather the opposite is visible. Besides that, it is the lucky nature of Bitcoin as a decentralized financial asset not to be solely dependent on the rules and regulations of one corporation. Price swings are as said somewhat normal to something that is that new and unbalanced.

Why futures?

The technical barrier to cryptocurrencies surely is an existing problem that is being addressed by different companies, promising an end-user friendly environment. The techy hassle is the pay-off for not being depended on a third party such as a bank, a futures commission merchant or an introducing broker.

Compared to an ETF, a future contract gain is more tax efficient in the US depending on holding time. Also increased liquidity is a clear advantage compared to an ETF, as a future is tradable 24h a day for 6 days a week. What makes futures to be criticised, is it’s biggest advantage at the same time: It is a fast access to a valuable asset versus a direct asset ownership. This would enable speculators to short bitcoin without possessing any.

Nevertheless, since the announcement of the future markets, fresh money has been pouring into the digital asset, raising Bitcoin’s market cap from 200 billion to 330 billion $ US in roughly two weeks. Great opportunities for the blockchain sector in general, as the money is also diverted into other cryptocurrencies, so-called Altcoins, which currently make up 45% of the total cryptocurrency market cap of 600 billion $ US.

Data from coinmarketcap.com

Why Bitcoin?

We have to bear in mind that we do not yet have a clear definition of what Bitcoin is for our society. But let’s also regard, that its volatility was additionally caused by bad press in the mass media, stating it as a safe haven for crooks and criminals and reporting on its crashes only. Apart from that it could be that we are not actually seeing how much the dollar deprives in actual value, so it might not only be Bitcoin’s volatility we are seeing here…

Image courtesy Resillience Group

But yes, the cryptocurrency’s theoretical approach to be used as a world wide decentralized currency has clearly ran into some issues. Transaction speed dramatically slowed down with the vast increase in users and fees turned out to be a lot higher than expected, making it close to impossible to send small amounts across the network. Yet demand is growing.

Banks have been listening to their customers’ requests since months, without being able to serve their needs. There is no link between the old world and the new at given time. And there doesn’t necessarily have to be, as bitcoin overtakes a banks function in many parts.

Usually a client sends an instruction to a bank to send money, which is executed by someone. The client needs to be a member of the bank and/or needs to be identified with their login and password. In the case of bitcoin, the transaction initiator uses a digital signature, called private key, which is sufficient for the transaction to be executed instantly.

There is no need for trust in intermediaries. So what‘s the point in having a bank having transactions and trades done in Bitcoin anyways?

Maybe because of its volatility. Or because of its uncertainty concerning rules and governance. Or is it just, that we love to have it the way we are “oh” so used too?

So either by time or by manipulation, in one way or the other Bitcoin will resolve its volatility in the long term.

Oama Richson

Chief Communications Officer

PECUNIO