Bitcoin Price Whipsaws while Investors Scramble to Cash In

  • 1 year ago
Bitcoin Price Whipsaws while Investors Scramble to Cash In

Bitcoin’s pricing mechanism remains an enigma to investors. The BTC/USD rate skyrocketed in 2019, after a prolonged period of rather lackluster performance since the Bitcoin Boom of 2017. As the leading cryptocurrency by trading volume and market capitalization, Bitcoin is now hovering around the $8250 range and an overall market valuationin the $146 billion range. In terms of market dominance, BTC makes up an estimated 55% of the crypto market with the next closest rival being Ethereum (ETH) witharound $27 billion market share. 


The Evolution of a Regulated Cryptocurrency 

Bitcoin has evolved dramatically since inception. When it launched, it was a ‘counter-currency’ operating in the wild west of the markets. Little regulation and near-zero understanding of the crypto market characterized the scene. Despite its purest intentions to operate outside the realms of the regulated financial market, Bitcoin and its trading peers have now entered the arena they intended to avoid. Institutional trading enterprises and frameworks making up the financial markets are working feverishly to regulate Bitcoin exchanges.

Nowadays, hedge funds and trading firms are operating fully licensed and regulated financial operations with Bitcoin as their primary commodity. Rather than investing directly in the ‘hard asset’, these financial firms are purchasing Bitcoin futures contracts to speculate on Bitcoin price volatility while avoiding the perils of hacking activity that have resulted in millions of dollars’ worth of BTC theft from major exchanges.  This frontier currency, which straddled the line between rogue financial asset and the currency of the future is quickly gaining worldwide acceptance.

The fact that Bitcoin futures trading has mass appeal is a stunning reality which established investment enterprises are fully accepting of. The cryptocurrency market was once an arena of known nefarious activity; now it’s a hive of activity with regulators scrambling to put all the protections in place to ensure accountability, safeguards for trading activity, and full tax reporting and compliance. The dark web element remains, but it is a rapidly shrinking component of the Bitcoin market. 

Why the Bitcoin Futures Market is So Important

The Bitcoin futures market is one of the most useful ways to hedge against market volatility in Bitcoin pricing. The futures market for digital assets guards against the problems faced by traders and investors who use the ‘Buy Low, Sell High’ paradigm. With Bitcoin futures, there is less concern about buying low and selling before price appreciation has had an opportunity to take full effect. For example, a Bitcoin rally may not yield strong gains for an investor if the investor cashes out too early.

By hedging against spot positions on BTC, investors can maintain greater agility in the financial markets and boost their returns by leveraging Bitcoin profitability for maximum yield. Bitcoin futures fall into a unique trading arena where traders can speculate on price movements while minimizing overall risk. Strong interest in futures contracts has driven the Bitcoin market in recent years. This market offers traders and investors a better way to lock in profits while trading in a volatile market. A combination of trading actions is possible, notably hedging price risk and speculating on market direction.

In May 2019, record numbers of Bitcoin futures investments were made across the US and the UK. Thanks to the protections offered by the BTC futures markets, vis-à-vis hedging strategies, significant profits were realized through this ‘padded’ investment activity. Consider that the price of BTC increased 100% between March 2019 – May 2019, harkening back to the glory days of 2017 when Bitcoin peaked at around $20,000. That price rush was driven by mass-market appeal and the power of social investment exchanges. It was around that time that the CME Group witnessed a multi-fold increase in futures contracts trading, to the tune of hundreds of millions of dollars daily.

Volatility Brings Investors into the Fray 

While casual traders tend to eschew volatility, institutional investors and brokers latch onto it for futures contracts trading activity. The CME Group has witnessed strong interest in Bitcoin futures contracts through investment in contracts. Many examples abound, including the 2019 purchase of a futures contracts exchange (Crypto Facilities) for over $100 million. This company’s Bitcoin Futures market topped out at over $84M in May 2019. Given how much interest in BTC is currently in play, it makes sense that institutional investors are eyeing the futures markets as the next big thing for Bitcoin.

Major cryptocurrency trading platforms are coming into their own, and massive trading volumes are already being recorded. From the NYSE ICE exchange through the LMAX Exchange Group, Bitcoin futures trading activity is on the rise. Various internationally-regulated Bitcoin exchanges are also seeing sharp increases in futures trading activity. Much of the hedging we are seeing is being done in an attempt to guard against the whipsaw price activity in Bitcoin recently. Futures activity has increased in 2019, while Bitcoin’s inexorable price march continues unabated. With futures trading activity, hedgers (buyers and sellers) agree to trade BTC at a fixed price and date. The futures market is also seen as much easier to engage in than simply buying and selling on a whim. Another major benefit of the futures market is leverage, since investors can multiply the value of their investments with futures at both domestic and international exchanges.