The main reason that in the Bitcoin market long-only investors have succeeded is that there is no effective way to cut the amount of Bitcoin. All of that would change in a month’s time if CME launches the Bitcoin futures.
CME’s Bitcoin futures
The announcement of CME’s that it would set up Bitcoin futures in December 2017 gave a boost to Bitcoin’s price. It is expected that Bitcoin futures would lend legitimacy to the asset class and we would see how institutional investors enter the Bitcoin market. If Bitcoin futures were approved by the CTFC, then it would be difficult for the SEC to block Bitcoin ETFs.
Nevertheless, Bitcoin investors might have missed the point. The launch of Bitcoin futures would provide bears with a means to short large quantities of Bitcoin; which they cannot effectively do nowadays. Terry Duffy, speaking to CNBC, the Chairman and CEO of CME said:
“Today you cannot short Bitcoin. So there’s only one way it can go. You either buy it or sell it to somebody else. So you create a two-sided market, I think it’s always much more efficient.”
Margin trading at exchanges
At the time when technically today one can short Bitcoin through margin trading at existing exchanges, the liquidity and volumes at these exchanges are not enough for large investors. Such exchanges as Bitfinex give users the opportunity to borrow digital tokens and sell them, subject to other users agreeing to lend the assets to the margin trader.
However, these exchanges are far and few between and most exchanges allow only regular buying and selling. Moreover, many exchanges like Bitfinex, don’t allow US citizens to margin trade on their platform. Regulated futures generate a whole new narrative, since these trades are cash-settled and short sellers don’t need to borrow Bitcoins.
Bitcoin futures may present a way to short Bitcoin, but it isn’t mean that trade strategy would be successful. Given Bitcoin’s wide volatility and penchant for sudden bull runs, futures might easily turn into a bear trap instead of providing bears with teeth. Even Jamie Dimon, who has attacked Bitcoin as a fraud and a bubble, has stated the position that he wouldn’t short Bitcoin in an interview in CNBC in September 2017:
“I am not saying go short. Bitcoin could go touch $100,000 before it goes down. So this is not (what you) advise somebody to do.”