Bitcoin Futures: Make Way for a New Kind of Whale

For bitcoin traders, all eyes should be on Dec. 10 and Dec. 18.

That’s when former self-styled bitcoin whales will be swallowed up like plankton as the CBOE and CME Group launch bitcoin futures contracts for the first time in history.

Over the next few days, I will be providing information on trading in the bitcoin futures market. My goal is to shed some light on its peculiarities and hopefully help people avoid mistakes. To start, it won’t just be the whales that will be devoured, but any other smaller crustaceans that choose to ignore the potential impact a derivatives market can have on an underlying commodity.

You see, in bitcoin’s cash market, where these whales exist, they swim amongst other bitcoin marine lives without necessarily attacking their co-habitants. The reason is simple. Everyone in bitcoin’s cash market is financially incentivized to keep the price of bitcoin high.

Sure, the market sometimes takes a dip, but that’s because some bitcoin holders are taking profits off the table. In the futures market, there is as much reward for the creatures on the downside as well as the upside. Tremendous wealth can be created in a falling market as it can be in a rising market. There are incentives on either side.

Essentially, bitcoin’s cash market is like a river. Its flow is dependent on constants and so it generally flows in one direction. The bitcoin futures market, on the other hand, is like an ocean with thermohaline circulation: its flow is dependent on several variables.

Marine life in the futures market is not as friendly. The waters are infested with killer whales. Apex predators that feed on other whales. They even feed on themselves.

Alright, enough of the marine analogy…

Changing tides

Journey through any of the bitcoin forums on Slack, Reddit and Telegram, and there is general happiness and optimism about the value of bitcoin with the advent of a futures market.

This is born from a lack of understanding of how futures markets work.

There is this misguided perception that the futures markets work in a similar fashion to the cash market. In fact, both markets are diametrically opposite.

Cash markets (e.g. stock exchanges and bitcoin exchanges) are primarily populated with optimists. Futures markets, on the other hand, are primarily populated with pessimists…

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