When they were first introduced, bitcoin futures were expected to boost prices and demand for the cryptocurrency. But analysts are now suggesting otherwise.
According to a recent report from well-known crypto markets analyst Fundstrat’s Tom Lee, bitcoin futures are the cause of “gut wrenching” weakness in the cryptocurrency’s price. Specifically, bitcoin prices demonstrate downward volatility around the expiration date of futures contracts as traders, who are long on bitcoin and short its futures contracts, sell their bitcoin holdings to generate “a handsome profit” for their futures bet. Lee calculated that bitcoin’s price has fallen by an average of 18 percent during the 10 days before contracts expire. It begins recovery from the sixth day onwards after contracts expire. (See also: How Are Bitcoin Futures Priced?)
The current situation is further exacerbated by two factors. The first one is the “awful” sentiment and technicals for bitcoin and cryptocurrencies as regulatory agencies crack down on cryptocurrencies. The second one is the absence of sufficient liquidity to stem the effect of a large selloff. Lee notes that there has been “slow progress” by institutional investors to create channels for crypto investment.
The next bitcoin futures expiration date is June 18 at the Chicago Mercantile Exchange.
Testing Lee’s Hypothesis
Previous analysis of bitcoin futures has suggested that they have had a limited effect on price for the cryptocurrency. This is mainly due to the low turnover volumes for futures contracts. Lee’s theory does not seem to take this into account. On the other hand, it does suggest that futures contracts are beginning to play an important role in setting bitcoin prices. Taking that proposition at face value, it does not seem to hold water at least in one instance. Bitcoin’s price was 9.1% higher on Feb 23, the date when CME futures contracts for the crypto expired, than on Feb 13. During that period, bitcoin’s price rallied by as much as 31.3% (on Feb. 20) over and above the price on Feb 13, suggesting that traders and investors were bullish on its prospects.
Lee is bullish on bitcoin’s prospects as well and has predicted a price target of $25,000 for the cryptocurrency by the end of this year. At 16:35 UTC, bitcoin was trading at $6538.42, down 1.5% from its price 24 hours ago. Since the start of this year, bitcoin has lost 51.2% of its value. (See also: Bitcoin Misery Index Price Of $20,000 This Year).
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