Trading Column `The Writing on the Wall´– Futures are Almost here, Is This the Right Time to Buy?

This post is the second in a trading tips series called ’The Writing On The Wall’, in which our game theory guide Eric Wall tries to anticipate market signals. This week’s focus is on timing your bitcoin investment and when it might be the best time to buy.

Is it a Good Time to Buy Bitcoin?

The price of bitcoin has risen +938% this year so far. What’s new for 2017 are the signs of institutional capital finally finding its way into the cryptocurrency market through various means (1,2), but we’re nevertheless also seeing an unprecedented influx of retail investors, with Coinbase adding roughly 50,000 users per day as of late. Many new speculators have been watching bitcoin from the sidelines for some time and are now warming up to the idea of finally taking the leap. But, given the tenfold increase bitcoin has already enjoyed this year, it is of no shock that the most echoed concern from these users is whether or not it really is a good time to buy right now.

In this article, I will do an analysis of the current market situation in bitcoin in order to try to answer that question.

First, we need to establish some time-frames on which the question is supposed to be evaluated. Essentially, what the question “Is it a good time to buy?” really is asking is whether or not there’s a good chance that there will be an even better buying opportunity presenting itself in the future. As such, I will analyze the prospect of that happening on three time-frames of different lengths.

1 month (December)

In December, the most crucial event taking place in terms of the bitcoin price is by all accounts the 18 Dec launch of cash-settled bitcoin futures on the Chicago Mercantile Exchange (CME). The CME is the world’s largest derivatives exchange, and is connected to hundreds of brokerage firms from all over the world. Its futures are traded by hedge funds, trading firms, portfolio managers, hedgers, individual traders and market makers, who collectively account for trading volumes of roughly 20 trillion USD on a daily basis. With the introduction of bitcoin futures on the CME, the global economy will gain access to exposure to bitcoin, and bitcoin will gain exposure to the global economy.

The introduction of bitcoin futures on the CME will doubtlessly impact the market in several ways. I contend that the largest impact that the futures will have on bitcoin is the impact on its legitimacy and its liquidity.

Legitimacy: One of the main reasons why the Winklevoss ETF was rejected was due to the fact that the majority of bitcoin trading volume occurred on unregulated exchanges which lacked surveillance and the controls necessary to prevent market manipulation in the eyes of the SEC. Moreover, Bitcoin still carries the taint from its Silk Road days, and is still seen by some as a tool for narcotics trafficking and money laundering. In fact, many large funds still consider bitcoin an un-investable asset solely based on these associations. The CME futures mark what I believe will turn out to be a historical turning point of colossal magnitude in terms of the acceptance for bitcoin and its legitimacy as an asset class.

 

Liquidity: Liquidity is one of the most important strengths of any currency as it is rudimentary both to its medium-of-exchange and its store-of-value properties. For the average investor this is not often a noticeable issue, but for an institutional investor the property of being able to enter and exit an asset without moving the market is one of the determining factors in whether or not the asset is investable at all. Even though the CME futures are cash-settled and act more as bets on the price of bitcoin than trading of the actual asset (as with spot markets), futures and spot market prices are tethered to each other through arbitrageurs and professional market makers, and thus benefit from each other.

Combined, these two factors of increased legitimacy and liquidity contribute to the fact that the introduction of CME futures is–broadly speaking–a very big positive for bitcoin in the long term. Based off of that alone, we should be able to expect a continuation of the current positive trend throughout December…

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