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Tom Lee, Wall Street Analyst and co-founder of marketing research firm Fundstrat stated on Bloomberg that bitcoin futures contracts might be a reason why bitcoin’s price has been plunging. Known for his historically optimistic stance on the flagship cryptocurrency, Lee’s former prediction that Bitcoin prices could reach record highs in July no longer seem likely.
The Effect of Expiring Futures Contracts
Lee stated in his report that there was “significant volatility” in the price of bitcoin, which he suspects is correlated to the closing expiration date of CME Group and Cboe futures contracts. He further cited a theory by crypto asset investor Justin Saslaw at Raptor Capital Management which concurred with his opinion.
“Bitcoin sees dramatic price changes around CBOE future expirations… We compiled some of the data and this indeed seems to be true,” added Lee in his report. “Overall, bitcoin has fallen 18 percent in the 10 days prior to CBOE contract expiration.”
Lee also noted that the new inflow of capital into the crypto market has not been enough to keep up with the new supply coming from ICO’s and mining rewards.
The idea that markets experience increased volatility when future contracts expire is a highly-respected phenomenon that’s been observed from stocks and other financial markets. While Bitcoin futures are based on a commodity class that’s never been seen before, Lee suggests that there is little reason to think why this phenomenon wouldn’t’ apply to the bitcoin market.
Back in May, the San Francisco Federal Reserve published a report that came to a similar conclusion. “The rapid run-up and subsequent fall in the price after the introduction of futures does not appear to be a coincidence…it is consistent with trading behavior that typically accompanies the introduction of futures markets for an asset.”
Some experts, however, see things differently. Chris Concannon, president and CEO of Cboe Global Markets, said that while he was excited to see the emergence of Bitcoin futures, he doubted the notion that they are affecting bitcoin’s price. Instead, he argued that “the fall of Bitcoin can be more easily explained by other factors such as recent regulatory scrutiny around the globe, steps by government tax collectors, the rise of other cryptocurrencies, and declining media interest in the asset.”
While opinions vary regarding the impact of Bitcoin futures and the price for bitcoin, almost everyone in the field agrees that the growth of these futures is helpful to the market. Gabriele Giancola, Co-Founder and CEO of Qiibee – a blockchain-powered loyalty platform – went on to say that both retail investors as well as the blockchain community at large benefit from these futures contracts.
“Bitcoin futures bring transparency and efficient pricing to the ecosystem and enables investors to speculate on the price of bitcoin without actually having to own bitcoin. While bitcoin itself remains unregulated, bitcoin futures can be traded on regulated exchanges and is good for those concerned about the risks related to the industry’s lack of regulation,” he said.
Giancola added that since bitcoin futures are regulated on public exchanges, people who might be skeptical about the perceived shadiness of the asset class can invest in it more confidently. He also mentioned that “institutional investors are also more likely to offer bitcoin futures to their clients as a viable investment option and it opens up the bitcoin market to a wider investor base, including countries where the trading of bitcoin has been banned.”
The Fundamental Value of Bitcoin
What these concerns invariably return to is the question of what a reasonable price for the flagship cryptocurrency should be? Unfortunately, economists have struggled to put a definitive price on Bitcoin, considering that as a digital asset the main determinant of its price level is the supply and demand of bitcoins at any moment. While Lee predicted Bitcoin’s price could end up as high as $25,000 by the end of the year, others are skeptical, especially in light of the sea of new cryptocurrencies entering the market, some even boasting features that Bitcoin lacks.