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how bitcoin futures affect price

how bitcoin futures affect price

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To summarize,existing bitcoin futures affect the price in a negative fashion in two primary ways:Consuming demand for capital that would otherwise flow into actual crypto marketsUsing leveraged trading to create excess sell orders and negatively impact sentiment

How do bitcoin futures prices work?

All futures contracts derive their value from their respective underlying security. Bitcoin futures prices depend on the currency’s spot prices. This is the market’s current price at which Bitcoin can be purchased or sold for immediate delivery. Any move in the latter affects the former.

What happens when Bitcoin futures expire?

If there are only two days to expiry, the futures price calculation formula simply tells us that the price of the Bitcoin futures contract will remain very close to its spot price because of the time remaining. But its spot price may shoot up or down significantly within hours because of high volatility.

Is there a chance of arbitrage in bitcoin futures trading?

If there is no chance of arbitrage, the futures price is the sum of the spot price and the cost of carry, which is reflected in the formula. Let’s verify this against recent historical values. With the risk-free rate value of 2.25%, Bitcoin’s spot price of $8,171 as of April 18, 2018, the futures price expiring in April comes to around $8,175.30.

How much will bitcoin cost in 2018?

With the risk-free rate value of 2.25%, Bitcoin’s spot price of $8,171 as of April 18, 2018, the futures price expiring in April comes to around $8,175.30. This theoretically calculated value is very close to the actual price of $8,180 at which the contract was closed on that date. So how do we account for that slight difference of about $5?

What Are Bitcoin Futures?

When Bitcoin first hit the market in 2009, no one was really sure where it would go, let alone whether the buzz would last. Because it was traded on a decentralized exchange, authorities thought this digital currency would lead to illegal transactions, money laundering, and even terrorist financing. But the market has come a long way since then.

How do Bitcoin futures work?

All futures contracts derive their value from their respective underlying security. Bitcoin futures prices depend on the currency’s spot prices. This is the market’s current price at which Bitcoin can be purchased or sold for immediate delivery. Any move in the latter affects the former. This relationship leads to the prices of the two moving in sync with each other, though there is a difference between the two.

What is the price of Bitcoin in April 2018?

With the risk-free rate value of 2.25%, Bitcoin’s spot price of $8,171 as of April 18, 2018, the futures price expiring in April comes to around $8,175.30. This theoretically calculated value is very close to the actual price of $8,180 at which the contract was closed on that date.

Why is the price of Bitcoin futures so close to its spot price?

If there are only two days to expiry, the futures price calculation formula simply tells us that the price of the Bitcoin futures contract will remain very close to its spot price because of the time remaining.

Is Bitcoin trading 24/7?

Bitcoin trades 24/7, which may mean its spot prices are prone to high volatility within hours—even minutes—based on local developments, while the futures market may remain open only for a specified number of hours. It’s possible that the futures price closed near the spot price one day but a significant development spiked Bitcoin’s spot price by 12% overnight, meaning investors can expect a wider gap when futures open the next day.

Do futures contracts follow spot prices?

Since futures contracts are believed to closely follow spot prices, you’re probably wondering why these differences occur. While the theoretical formula is good for the ideal case without arbitrage, it doesn’t account for the real-world perception of volatility and price arbitrage.

Does Bitcoin have a wild swing?

Beyond any theoretical calculations, the price of Bitcoin futures in the real world tends to run with wild swings in either direction. To understand the randomness in the price discovery mechanism of futures, let’s look at how prices of these futures contracts have behaved in the recent past:

Do Bitcoin Futures Affect Prices in a Manner Similar to that of Gold?

While there isn’t much precedent for what’s happening in crypto markets because the asset class is still new, there is a precedent for futures being used to distort price discovery and manipulate prices in another market: precious metal s.

What is the ICE?

Atlanta-based Intercontinental Exchange Inc. ( ICE ), the parent company of the New York Stock Exchange (NYSE), has announced that it plans to launch a digital assets platform and physically settled bitcoin futures product.“. Bakkt will create this new platform.

When did the crypto bear market start?

The current crypto bear market began shortly after CBOE and CME futures launched in December of 2017 and right around the time that Bitmex volume started ramping up. Have future markets been a catalyst for the recent crypto cataclysm?

What is a futures contract?

A futures contract is an agreement that two parties enter into with the intention of buying and selling an asset at a predetermined price at a specific date in the future.

How much can you trade with Bitmex?

Bitmex allows leveraged trading up to 100x. That means that traders can trade with 100 dollars for every 1 dollar of real capital they have. This model creates an easier opportunity to manipulate prices.

What is a physical backed future?

When we say “physically-backed” futures, we mean contracts that are settled in the underlying asset. In other words, these types of futures contracts require ownership of a real asset. In comparison, most futures contracts are simply paper bets.

How much has the VIX shot up in a day?

The VIX shot up over 26% in a single day.

Liquidity and Stability

With increased Bitcoin futures provision, Bitcoin is becoming more available to huge players hence driving a lot of money into the Bitcoin market. The reasoning behind this is that Bitcoin futures traders do not own Bitcoin wallets or addresses; hence it will increase retail and investor volumes.

Arbitrage

Bitcoin prices vary from exchange to exchange based on events, order book demand, among other factors. When there is a significant enough price difference, a trader could buy BTC on one exchange at a lower price and sell it on another exchange at a higher price – arbitrage.

Shorting Bitcoin

Another interesting contribution to the price is shorting Bitcoin. Many people watch the futures market in a bid to measure the sentiment.

Hedging

Most investors are going into Bitcoin futures to get a hedge against volatility associated with Bitcoin. In an event where you buy a futures contract, you immediately know what you are risking and how much you stand to lose or gain.

Do Bitcoin Futures Affect Prices in a Manner Similar to that of Gold?

While there isn’t much precedent for what’s happening in crypto markets because the asset class is still new, there is a precedent for futures being used to distort price discovery and manipulate prices in another market: precious metals.Precious metals markets have long since been subject to manipulation by large banks. Several banks have admitted wrongdoing and faced fines for manipulating gold prices. Many believe that the prices of gold and silver have been kept artificially low through the use of leveraged paper contracts.Dr. Paul Craig Roberts, the former economic advisor for the Reagan administration, has written extensively about this subject.In his view, some of the biggest banks in the world have been working to suppress the price of gold in Western markets for many years. They accomplish this through creating so-called “naked shorts” out of thin air (the term vapor contract term we’ve been using is analogous to a naked short).A naked short is simply a contract that allows an institution to place a sell order for a particular asset without having any ownership of the asset.In other words, it allows a bank to flood the market with fake sell orders, creating downward market pressure. Given that banks can create these shorts to the moon without any accountability, they can keep the price down at a level more or less of their choosing for quite some time.

How does Bitcoin affect the price?

Bitcoin futures can affect the price by creating negative sentiment and triggering stop-loss orders at key technical price levels.The effect may seem small, but a reliable pattern does emerge.In summary, professional traders use leveraged futures contracts to manipulate prices and scalp profits from unsuspecting retail investors.

How much did bitcoin drop in 24 hours?

This was a drop off nearly $700 in under 24 hours on the highest volume of the month. Then again on November 30th, the last Friday of the month, notice that the price for bitcoin drops nearly $400 or 10% in the 24 hours leading up to futures expiration on both CME and Bitmex.

How does Bitmex work?

Bitmex allows leveraged trading up to 100x. That means that traders can trade with 100 dollars for every 1 dollar of real capital they have. This model creates an easier opportunity to manipulate prices. If there were ever a platform to use futures to affect the price of bitcoin, Bitmex would be it.While there is only limited evidence to indicate that BTC is being manipulated in a manner similar to gold, the CME and CBOE futures markets do, at the very least, cannibalize demand for actual coin.With vapor futures contracts, capital winds up washing around in an ephemeral sea of greed whereby traders seek to profit from making bets against each other’s estimates of what tomorrow’s price will be. Professional traders use sophisticated bots, algos, quant trading, spoofing and other tactics to scalp profits from unsuspecting retail investors. A portion of that capital might otherwise be flooding crypto exchanges with buy orders that push prices higher.Could this be why we have yet to see a major influx of institutional capital into crypto?Are the soon-to-be whales who want to establish themselves as key players in this market by owning real digital assets waiting for the opportune time to acquire coin?What does available market data reveal?

How is the price of gold determined?

The price of gold is determined by paper exchanges that are not directly tied to the actual supply/demand dynamics of physical gold.Dr. Paul Craig Roberts explains:“The primary venue of the Fed’s manipulation activity is the New York Comex exchange, where the world trades gold futures. Each gold futures contract represents one gold 100 ounce bar. The Comex is referred to as a paper gold exchange because of the use of these futures contracts. Although several large global banks are trading members of the Comex, JP Morgan, HSBC and Bank Nova Scotia conduct the majority of the trading volume.”While those of us in America usually check the COMEX price when looking at the current price of gold, there may be even more to the story:“In addition to the Comex, the Fed also engages in manipulating the price of gold on the far bigger–in terms of total dollar value of trading–London gold market. This market is called the LBMA (London Bullion Marketing Association) market. It is comprised of several large banks who are LMBA market makers known as “bullion banks” (Barclays, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorganChase, Merrill Lynch/Bank of America, Mitsui, Societe Generale, Bank of Nova Scotia and UBS).”Simply put:“The Fed’s gold manipulation operation involves exerting forceful downward pressure on the price of gold by selling a massive amount of Comex gold futures, which are dropped like bombs either on the Comex floor during NY trading hours or via the Globex system.”This would explain the nonsensical more-or-less sideways movement in precious metals markets. Even as a global selloff erases trillions in paper wealth, gold and silver prices have barely budged in USD terms (although gold is now nearing a 5-month high, it is still down 7% year-to-date).Those that benefit from the current fractional reserve fiat monetary system do not want to see competing currencies thrive or attract investor attention. This has applied to gold historically, but it is logical to assume that their hostile views extend to the new form of money, cryptocurrency.

What is cumulative impact?

The cumulative impact is a suppression of prices over time.While these leeches make money, they add little value to society and are not advancing the ecosystem. They have no true appreciation of the power of blockchain technology or potential of cryptocurrency to significantly improve the well-being of humanity.

When will Baakt launch?

As mentioned, Baakt will offer physical futures contracts, planned for launch in January of 2019. VanEck is also awaiting a decision by the SEC for a new physical future contract platform. NASDAQ is planning a futures launch for the first half of 2019, although it’s unclear if they will offer physical settlement.

How Bitcoin Futures Affect the Price: Futures Defined

A futures contract is an agreement that two parties enter into with the intention of buying and selling an asset at a predetermined price at a specific date in the future.

Do Bitcoin Futures Affect Prices in a Manner Similar to that of Gold?

While there isn’t much precedent for what’s happening in crypto markets because the asset class is still new, there is a precedent for futures being used to distort price discovery and manipulate prices in another market: precious metals.

Market Analysis of How Bitcoin Futures Affect the Price: 4 Months of Data

Let’s examine the potential impact of CBOE and CME vapor futures contracts on the price of BTC using market data from Coinmarketcap.com.

How Do Bitcoin Futures Affect the Price if They are Physical and not Vapor Contracts?

With the advent of physically-settled future contracts, a similar pattern may emerge. Only this time, bitcoin futures will affect the price to the upside, as purchases of real bitcoin from exchanges become necessary to settle the contracts.

How Do Bitcoin Futures Affect the Price? Negatively, But Not for Long

One way or another, true price discovery is being distorted, in whole or in part, by the use of vapor futures contracts. A clear correlation can be seen in the expiration time of futures contracts and the BTC/USD trading pair.

The Problem

Enemies with unlimited cash (The Federal Reserve Board or the International Monetary Fund, for example), can suppress the price of bitcoin; here, I demonstrate why their suppression can have only temporary effects. Exactly what price suppression can achieve, long term, is debatable and not the topic of this article.

Futures Markets

Price manipulation can be accomplished through the cash-settled futures market. Here’s how: Imagine you have 1 bitcoin and wish to bet on its future price. Suppose the spot price is currently $50,000.

How Manipulation May Occur

The evil anti-humanity Marxists wishing to damage Bitcoin may try to drive the price down by selling futures contracts heavily and at a loss (at lower prices than the pro-humanity individualists participating in the free market).

Manipulation By Inviting Arbitrage

Imagine, after heavy selling, the futures contract price is $49,000, suddenly dropping from $65,000, but the spot price hasn’t moved from $50,000. (The spot price would move, but imagine it hasn’t yet, I’ll show why it does move, “automatically.”)

Does This Work?

It depends on what you mean by “work.” This does suppress the bitcoin price, but only temporarily, and I’ll explain why later.

The Solution

While this manipulation is effective against gold, it won’t work for long against bitcoin. This is because bitcoin is easy to take into custody and to spend directly, peer to peer, to anyone in the world, instantly. Gold isn’t. Of course, I’m not saying you can’t take custody of gold – you can, but it’s not commonly done.

Summary

In summary, I explained how price suppression MAY be occurring (and likely is), and how it works using the futures market. I also explained why it can’t persist long term. Presuming that bitcoin’s experience will be the same as gold’s is fundamentally flawed because bitcoin does not have the same relevant, exploitable weaknesses as gold.