With the bitcoin market crazy, the whole market for the upcoming launch of bitcoin futures and cheer, first in CBOE, then in CME, bitcoin therefore reached the highest point in history.
They put the mainstream bitcoin futures as institutional investors accept bitcoin is approaching, signs of “To Da moon”. Fast forward to today, this feeling is just the opposite: tramps only scratching, licking the wounds.
So, what happened?
Although there are many factors in bitcoin so far into the worst bear market, but we can not ignore the potential negative impact on the futures market.
In this paper, I will look at how futures contracts are used to distort the market, and why the contract delivery is an important characteristic of futures contracts.
But first, let us start from the theory of futures.
Physical delivery and cash
The futures contract, one is the main type of financial market contracts, Include Cash settled futures and related basic assets physical delivery futures.
When you use the cash settlement of futures, you just bet on the price of the underlying asset. You will be posted as collateral on a certain number of futures contract, the collateral will be adjusted according to the profit and loss of future futures contract.
The cash and futures of real contrast
After the expiration of the contract, the exchange will only cash settlement of futures trading, do not exchange any underlying assets. It is mainly used for basic assets cannot be delivered or cannot be delivered.
When traders on the S & P 500 index stock index futures positions, cash is usually used in the stock futures market. In this case, the cash settlement transaction is much more simple.
This is in contrast with the real settlement of futures contract, the counterparties agree to exchange assets at the end of the contract. At the expiration of the contract, will receive assets from the short side.
Place of delivery and terms stipulated in the contract, the exchange will implement the basic rules. This is mainly used in the commodity market and foreign exchange market.
So why the contract deliverables are important to the foundation of the market?
Cash futures manipulation
In view of the future cash settlement does not involve the basic assets of their own transactions, so there is no set of futures contracts will be how to use the parameters. The only variable is specified in the contract price and time expires.
This basically means that any person has enough large positions based on assets are available through the market entity to influence the price of the futures market.
How do we know this would happen?
This is a kind of market manipulation strategy as everyone knows, is called “beat closing”. This has studied the potential of manipulation. There are also companies using this technology precedent.
CFTC “popping off” definition
A large number of hedge fund positions before the expiry date of the future may be in the price of underlying assets held in creative activities. They will try to take advantage of their position and other strategies, such as negative marketing activities to drive the price down. You can read more about Herbalife shares some strategies used in the past.
Of course, in a transparent and open stock market, this is very dangerous. People can see who is trading in what and when trading on the order book. The SEC and CFTC regulators aggressively pursuing market manipulation cases.
But in the encryption money market is not regulated and opaque?
BTC futures manipulation
Even before the launch in CBOE and CME futures, there are many investors looking for ways to shorting bitcoins. The introduction of exchange traded futures contracts is an open invitation.
In addition, in view of the future is a cash settlement, hedge funds and crypto currency giants see the favorable opportunity of suspicious strategy. Even in the Wall Street Journal (Wall Street Journal) before the release, when they discussed the risk control, assuming that this point.
Indeed, the price of bitcoin published in the CME before it reached the highest point in history, this situation is quite suspicious. Large accumulation of real bitcoin investors so as to improve the spot price and then the future price is completely feasible.
It can be said that they hit the “open” button.
CME futures opened the global currency markets collapse
With the opening of these contracts, people began to accumulate cash futures market positions. They locked the futures price due to nearly $20000, the contract will expire in January.
Then, they began slashing prices at the time of closing.
The bitcoin reserves accumulated in futures before the opening can now start to sell bitcoin in the spot market. They lock the higher price level of these physical assets, and lower prices, and earn cash in the futures market.
Cash, buy. Rinse, repeat.
CBOE and CME are aware of these risks, so they decided to put the KYC full price as the futures price reference point. For example, CME cited 5 well-known exchanges including Coinbase, Bitstamp and Kraken, the collection price, CBOE quoted a Gemini exchange.
However, there is no way to contain a large and opaque global market. Most of the trading volume of bitcoin is carried out in the offshore exchange, while the KYC approach is not so thoroughly. If the world prices began to decline, the reference exchange price will decline.
Theoretically, it seems reasonable. But it really happened?
If the bitcoin reached the peak and then fall, it seems perfectly depicted the introduction of futures. When the CBOE contract, but no interest in futures opened, CME futures started trading, trading volume rose steadily.
We do not need to see the views of the Federal Reserve Bank of San Francisco. Have enough confidence they had a significant impact for bitcoin futures market assertion. The article points out:
“The new investment opportunities in bitcoin stock market decline in demand, so prices drop. With prices falling, pessimists began by betting money, encouraging further selling and further depress prices.”
Therefore, although they did not propose any coordinated operation of the case, but they are explained if this happens, the exact dynamic will happen.
We can also observe the futures market maturity of stock market volatility rose sharply. As Fundstrat Global Advisors Tom Lee points out, this shows that traders may have been in active trading market entities, to have an influence on cash futures market.
Therefore, although this is not conclusive evidence of manipulation, but it does for the NASDAQ listed futures cash painted a frightening picture, and this may further promote the volatility of the unnecessary.
So, what can be done about it?
Bitcoin is a very easy transfer of assets. It is better than the stock, commodity and currency more easily transfer.
Therefore, it seems to be the ideal candidate for the physical delivery of bitcoin futures. The other party in accordance with the contracts agreed to enter into a futures contract. They will agree with the actual purchase or sale in asset maturity.
This also means that the future short (sell) bitcoin individual will have to bitcoin into memory, so that the actual send to the buyer at the expiration of the contract. They can not be used alone to bitcoin, on the spot market by buying pressure.
More transparency, more uncertainty, lower volatility. The actual delivery of the bitcoin futures may actually help to reduce volatility, for enterprises and investors to ensure future prices for their final transaction.
So, what we can expect to see the actual agreement?
You must have heard of the exciting products and technology companies are developing Bakkt. This is a by the Intercontinental Exchange (ICE) to support the digital currency plan.
One of the most important things in their upcoming is their actual delivery of Bakkt bitcoin ($) daily futures contract. A bitcoin delivery of these requirements is stored in the Bakkt in the warehouse.
Bakkt futures contract
This means that they will be in the physical storage Bakkt bitcoin, Bakkt will be saved in a fully transparent manner before the expiration date. Before expiration of the contract, the seller is not in the real future market in any capacity using bitcoin.
These contracts will allow large transactions, and will use the ICE mature financial market infrastructure and technology.
Bakkt bitcoin futures will be launched in January 24th next year. To see whether these products can inhibit cash futures fuelled volatility will be interesting.
There is no doubt that this year the encrypted currency market is a tough year. This community is cheering for any form of potential mechanism using, without considering its impact on the market.
Cash futures is one of them.
The market by some very clever, hedge fund giant and traders composition algorithm encryption. They know the exact dynamic cash for futures is still in the bud of the bitcoin market brings.
Whether they actively use this to enrich themselves, no one can say truly. But obviously, the large-scale institutions bring many people want to cash and futures.
Therefore, when we usher in the new year, let us focus on the real ecosystem value and help with financial products.