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Futures Trading – Bullish or Bearish for Bitcoin?

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Writing anything against the price rise in bitcoin is like keeping your head in a guillotine and expecting it to be unhurt. However, at times, one’s got to do what one’s got to do. So, at the risk of ruffling a few feathers among the bitcoin enthusiasts and staunch supporters, I will put forth my two cents on why the latest rally in bitcoin is looking bubbly. Only time will tell whether my argument proves to be correct or falls flat on its face, similar to the ones proclaimed by the legendary investors.

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Key points

  1. Bitcoin’s rally is looking like a bubble
  2. Futures trading will pit the bulls and the short sellers against one another
  3. Introduction of Nikkei futures trading turned out to be bearish for the Japanese stock market
  4. Sell 50%  bitcoin holdings at the current levels and stay in cash

We had recently warned that bitcoin is topping out in the short-term. While bitcoin fell after our article, the dip was more of a buying opportunity rather than the indication of a top that we were referring to. Whoa, there goes my forecasting capability out of the window.

However, does the rise above $16000 and a market capitalization of above $300 billion make us change our view? Not really. I now believe that we are about to make an intermediate top.

The common gripe among the cryptocurrency enthusiasts is that being a new asset class, bitcoin is not understood by many traditional investors (include me also in this list) who keep questioning its incessant rally. On the other hand, the traditional investors point that the price has gone well ahead of its fundamentals.

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There is going to be a big clash between these two school of thoughts with the launch of bitcoin futures.

What can happen after the launch of bitcoin futures trading?

I will try to explain how things will play out according to my opinion.

The launch of bitcoin futures trading will provide an opportunity to the institutional investors to diversify their investments into a new asset class. Nevertheless, it is difficult to fathom how many will buy, especially when the cryptocurrency has risen more than 16 times this year.

Until now, most of the money used to be on the long side of the trade. Some of the sharp falls were a result of profit booking or due to investors not stepping in to buy at lower levels due to the negative news flow. There was never an overhang of short sellers on bitcoin prices, which is going to change from December 10 and December 18.

So, with every part of the rally, there will be an equally bearish short seller who will see an opportunity to benefit from the fall in bitcoin prices. Money will be made both on the way up and the way down.

Will the short sellers jump into the fray at once?

Difficult to say, but my anticipation is that the short sellers are unlikely to jump in to sell bitcoin futures aggressively, especially since bitcoin is backed by a strong upward momentum. Large short sellers are likely to dip their feet with small short positions and watch.

As now we have traders willing to take both sides of the trade, we expect the pace of the ascent to slow down and short positions to start accumulating on every rise. Volatility is also likely to increase in the short-term.

Introduction of futures trading is not always bullish

Though we don’t have an apples to apples comparison for cryptocurrencies, we can look at how the Japanese stock markets were affected by the introduction of Nikkei futures trading in Osaka Securities Exchange.

The Japanese stock market was riding high on the back of a bubble in asset prices, which also boosted the prices of Nikkei stock exchange. The index rose 10 times from 1975 to 1990.

Nikkei futures trading started in Osaka Securities Exchange in 1988 and the Nikkei stock average peaked in end-1989. The descent was equally sharp as the ascent.

Some may point that the crash in Nikkei happened only two years after the futures trading started. However, one must keep in mind that it took 15 years for the Nikkei to rise 10 times while bitcoin has risen 16 times this year itself. Therefore, the fall is also going to be equally vicious.

Signs of excesses in bitcoin

  1. Almost every cryptocurrency trader(other than hacked.com subscribers) believes that this time it is different and one can make tons of money within a short span of trading in cryptocurrencies. After all, the Winklevoss twins have become billionaires by starting with just $11 million four years back. There is a firm belief that bitcoin is the future, hence, every fall will only rally higher than the previous one. See, all the analysts’ targets.
  2. Analysts are beating one another in announcing targets on bitcoin. I believe the maximum is $1 million by 2020, by John McAfee. Let’s see if there is any analyst brave enough to top this one, especially in the medium-term time frame of 2-3 years.
  3. A vertical rally. 16 times increase in value within a year is evidence enough that the rally is overheated. Expecting the same pace of rally in the future is like asking Usain Bolt to complete the marathon with the same speed that he runs the 100 metres race.
  4. The institutional investors will be eager to jump in to buy bitcoins and once those billions start pouring in, there is no end to the rally. This is not true because the large institutional investors are hugely risk averse. Their money is made in compounding about 15%-25% consistently over the years. It is unlikely that most will enter the fray until bitcoin’s volatility reduces considerably.
  5. Consider the world’s population of 6 billion and the fact that there will only be 21 million bitcoins mined. Additionally, out of that, millions are either lost or are locked away with only a few millions in circulation. So, the price rise is justified. Well, if Leonardo da Vinci had a few hundred thousand paintings in the market place, his paintings wouldn’t have fetched millions. So, this argument of only 21 million bitcoins that will ever be mined doesn’t hold ground.

OK, so if bitcoin is in a bubble, what should one do with it?

For people who don’t own bitcoin currently, please stay away from it, until you see a large correction.

For the others who own bitcoins, 50% of the positions should be closed right away, above $16,000 levels before the futures trading starts. The other 50% of the position should be held. This can be sold when bearish patterns develop on bitcoin because no one can point the top in a bubble.

Likely scenarios to play out if bitcoin falls

There are two possible scenarios that I believe can happen.

  1. Bitcoin falls and drags the sentiment down for the whole cryptocurrency universe. It doesn’t take a long time for the sentiment to get sour. In such a case, people who have been hoping that altcoins will rally when bitcoin falls will be in for a rude shock.
  2. The second scenario is that the current investors in bitcoin will face a stiff resistance from the short sellers. When the existing whales are unable to influence bitcoin prices like before, they are likely to jump to the altcoins because they don’t have to counter short sellers there. In this case, the altcoins recover sharply.

Conclusion

The best way is to cash your bitcoins into dollars and sit out. Once the dust settles down, there will be many opportunities to earn money because cryptocurrencies, as an asset class is here to stay.

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19 Comments

19 Comments

  1. dcslesser

    December 8, 2017 at 9:35 am

    Disagree with the whole premise. First of all the example about the Nikkei – note the time frame the crash occurred 2 years after the Futures were initiated! Second the spot Market is not going to be affected by an artificial Market which is strictly a bet on future prices and has no causal effect on the actual cash Market. Third there is so much expectation for a correction and has been for a while that the psychology of the situation (negative sentiment) is that we are not near a top! This is my belief and I am continuing to hold.
    RE the second point: if someone can explain to me how the Futures Market (which is cash settled) will affect the actual Market Ill stand corrected on that point… having said all this I do believe BTC is overvalued on a “fundamental” basis because there has not been enough adoption and the transaction cost is too high but it is acting more like gold 2.0 and there will have to be a better method of lowering transaction costs and increasing speed or using an alternative coin. All this is only my humble opinion though! Obviously it’s all about future expectation

    • cryptolion

      December 8, 2017 at 11:50 am

      Thank you for a well-reasoned article. I did cash-out when Hacked called top earlier and I am sucking up the pain now. No hard feelings!

      There are two possible beliefs about this “bubble”,
      * it will be different this time
      * it will not be different this time

      Those who believe that Bitcoin will continue to soar will HODL – easy for them. This is a very low cost approach to wealth management.

      Those who believe Bitcoin will crash for ever should sell everything and go to cash. Again this is a low cost approach.

      Those who believe Bitcoin will crash (to 8k to 3k?) and then the market will grow in the long-term (the majority of right-thinking people 😉 have to bear the management cost of working out what to do.

      Thinking aloud, in Chess we say any plan is better than no plan, it certainly has the advantage of reducing anxiety.

      The whole selling half thing is fine – but when should you sell half? I now think that the thing to do to manage risk is to have a plan to “sell half” at various levels all the way up to $60k. You can then set up the limit orders and go to bed. You know that however stupidly high it goes you will always both be taking profit and retaining a stake. This might not be the best plan – but at least it is a plan.

      It is safe to assert, as you have done, that the market will become less volatile after a few months. That, after all, is the point of a futures market. At that point I will put 90% of my funds into index investments and trade 10% badly as a hobby.

      For me the big question is what will happen to Alts? The fundamentals for all of them are weak over the next 3 years, so we are looking for speculative gains in the short term.

      I like your insight that big investors have done very well from rigging the market for Bitcoin and when they are unable to continue to do this will move to Alts. Rigging markets is a business plan that works. If you have a plan that works you keep doing it until it stops working. Therefore over the medium-term (3 years) there is another good reason to believe that Alts will out-perform Bitcoin after a terrifying crash when money leaves the market.

      So my plan for January (ie after the crash)

      30% BTC
      70% Top 20 Alts

      Rebalanced weekly (say)

      • emceeanders

        December 8, 2017 at 3:48 pm

        How would you weight the top 20 alts? By market cap or just split the 70% evenly between them?

        • mvppvm_07

          December 8, 2017 at 4:59 pm

          It seems to me that the marketcap question is one that could be discussed well on this site. The”cap” metric is too simplistic, IMO.

          All an ICO/ asset token needs to do is create a billion or five units, price it at the existing frenzy and it can challenge the presumptive “top 100”. I don’t know what to choose (yet) as a better metric but I’ve begun studying various metrics to work out a personal “valuation index”. Liquidity, exchange diversification (to either create arbitrage or to enhance liquidity), roadmap development, legacy market support, buy-out strength, TA, underlying tech (POS, PoW)…to name a few things that correlate to a metric. I say this to ask your question about weighing the top 20 a different way than through simplistic market cap:

          What metrics matter?
          What weight “should” a metric hold?
          Can one correlate legacy TA with a largely unharnessed (the word I use instead of “unregulated”, which is used inadvertently by legacy investors as a nod to traditional investment markets)…unharnessed assets?

      • Rakesh Upadhyay

        December 8, 2017 at 4:17 pm

        Hello cryptolion,

        I like your approach of allocation, 30% in BTC and 70% in the top 20 alts.

        However, I am not very fond of index investments. A little discipline and a good strategy should easily help you beat any index investment. So, on this I disagree with your approach.

        Together, we will select the best alts to invest and benefit from by changing the allocation.

        Let’s wait for a few days and see how things pan out.

        With warm regards
        Rakesh Upadhyay

    • Rakesh Upadhyay

      December 8, 2017 at 4:10 pm

      dcslesser,

      Disagreement is great because it makes us to question our belief and see it from another angle. Hence, I appreciate your point of view.

      On your doubt about the futures market.

      Let’s assume that if the short sellers are able to push the price of bitcoin down in the cash settled futures market to $12000. Will the buyers purchase bitcoin in the spot market at a higher price of say $13000? NO! Traders would rather buy in the futures market.
      So, when the buying dries up, there is no option but for the price in the spot market to correct to the level in the futures market.
      The difference will also provide an opportunity to the large traders who do arbitrage trading. They will force the price of both the segments closer to each other.

      Hope this clarifies some of your query. If not, you are free to question me again.

      With warm regards
      Rakesh Upadhyay

  2. dissonance_engine

    December 8, 2017 at 11:34 am

    I agree with the author in the perspective of a trader and not a HODLR, best to sit this one out and see how the market reacts before entering into any new positions. Futures traders are incessant short sellers so this is my concern as well. Bitcoin is definitely going to continue to rise in the long term, and I think institutional investors will stay away but something like an ETF could bring in more market capital as well. Just my two cents.

    • Rakesh Upadhyay

      December 8, 2017 at 4:18 pm

      Hello dissonance_engine,

      Agree. ETF will certainly make a huge difference.

      With warm regards
      Rakesh Upadhyay

  3. MinerMatt17

    December 8, 2017 at 3:01 pm

    The comparison to paintings is just silly. Paintings are not a liquid and secure store of wealth. Digital gold is..

    • Rakesh Upadhyay

      December 8, 2017 at 4:20 pm

      Hello MinerMatt17,

      Well, I disagree. Art collection is another alternative investment and has a strong history of being a secure store of wealth.

      With warm regards
      Rakesh Upadhyay

      • MinerMatt17

        December 8, 2017 at 6:40 pm

        Art is not Fungible, it is not divisible, it is not easily deliverable.

        It may be an alternative investment but to use it as a argument to compare to bitcoin is very foolish.

        • Rakesh Upadhyay

          December 8, 2017 at 8:10 pm

          Hello MinerMatt17,

          Hmm, the reason I compared the painting with bitcoin is because, currently bitcoin’s use as a currency is limited. It is neither consumed as a commodity. So, the only other use is its storage value. Additionally, I have heard the 21 million cap on bitcoins enough number of times, hence, thought to compare it with a painting to show that its exclusive value is not great if millions of coins are in circulation.

          May be it is very foolish, but that is what I could think of. Thank you for your opinion anyways.

          With warm regards
          Rakesh Upadhyay

          • MinerMatt17

            December 8, 2017 at 10:14 pm

            It is a digital store of value primarily yes. But ss many have said before me, bitcoin is a platypus, it does many things in its own way. However, paintings are not fungible, divisible, or easily transferable.

            Any comparison of bitcoin to anything else has to be made with all these characteristics in mind, not just a supply.

  4. emceeanders

    December 8, 2017 at 3:50 pm

    Rakesh – when you wrote this article BTC was over $16k, do you think it will spike back up there before futures trading start?

    • Rakesh Upadhyay

      December 8, 2017 at 4:23 pm

      Hello emceeanders

      Currently, bitcoin is taking support at the 20-EMA on the 240-minute chart. A pullback to at least $15,500 looks likely. (Levels are referenced from the HITBTC exchange).

      Once above this, a retest of the highs is also possible. Things will be very volatile initially after futures trading starts.

      With warm regards
      Rakesh Upadhyay

  5. Steppa75

    December 8, 2017 at 7:38 pm

    Totally agree, Im sitting it out and waiting to scoop up some bargains for many altcoins in the crash.

  6. Steppa75

    December 8, 2017 at 7:45 pm

    Also i strongly suspect there are a lot of people now buying BTC who know nothing about it and buying the news, the coinbase app being top of the app store etc. Probably thinking they are going to get rich quick.
    They might well panic sell sharpish if there is a crash and they see there BTC worth much less. They will probably only see the high headlines and be totally unaware just how volatile it can be.
    Hope too many people don’t get burned though to be honest for their sake.

    • Rakesh Upadhyay

      December 8, 2017 at 8:02 pm

      Hello Steppa75,

      Many are likely to lose thousands of dollars, if bitcoin crashes. That is just the way of the game.

      With warm regards
      Rakesh Upadhyay

      • MinerMatt17

        December 8, 2017 at 10:15 pm

        Yes it will “crash” losing much of the value it gained in the last few days, but it will rise right back after that as it always has done.

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Altcoins

Monero Forges Ahead as Prices Cross $290

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Monero shot up again on Tuesday, as the privacy-focused altcoin approached new highs on the promise of lower transaction fees.

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XMR/USD Price Levels

Monero has been on a tear for the past five weeks with prices more than tripling since Nov. 5. At press time, XMR/USD was up 7.5% at $289, where it was not far from session highs. The cryptocurrency recently established new lifetime highs north of $307. A re-test of those highs could be imminent as XMR continues to push north of $290.

With the latest gain, Monero has added 20% over the past five days, and is ranked no. 7 in terms of dollar-denominated market cap. The total value of XMR in circulation is now $4.6 billion, according to CoinMarketCap. That puts it above NEM (XEM), bitcoin gold (BTG) and Stellar Lumens (XLM).

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Monero’s trade volumes remain well below altcoin leaders Ethereum, Litecoin and IOTA. As of Tuesday, XMR turned over $188 million over the previous 24 hours, with South Korea’s Bithumb responsible for about a quarter of total transactions. The XMR/BTC exchange on HitBTC saw nearly 17% of the daily turnover. XMR/USD traded on Bitfinex also saw more than 16% of total transactions.

Although significant, Monero’s gains have occurred in lockstep with the broader cryptocurrency universe, with altcoins benefiting significantly from bitcoin’s record highs.

Bulletproofs Present Cost-Saving Potential

Monero Research Labs is working hard to reduce the network’s transaction fees by up to 80%, a signs of a bright future for the leading altcoin. The implementation of Bulletproofs also appears to be working in favor of lowering transaction sizes on the network.

For the uninitiated, bulletproofs are essentially an improvement in the bandwidth efficiency of Monero’s confidential transactions. Bulletproofs are also capable of lowering both the transaction size and transaction fee of the Monero platform. The implementation of this protocol is expected to benefit Monero in other important ways, such as faster verification times.

Monero developers are implementing bulletproofs in two stages, the first being the single-output proofs. This will be followed by multiple-output proofs at a later stage. As of last week, Monero said bulletproofs are moving into testnet shortly.

“Overall, bulletproofs represent a huge advancement in Monero transactions,” Sarang Noether wrote in a Dec. 7 blog on the Monero website. “We get massive space savings, better verification times, and lower fees.”

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

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Altcoins

Ethereum Flirts With Record Highs as Buterin Compares Crypto Surge to Salvator Mundi Auction

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Ethereum prices climbed to fresh records on Tuesday, as crypto mania picked up where it left off before the launch of bitcoin futures over the weekend.

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ETH/USD Price Levels

The value of ether touched an intraday high of $522.63, which was the highest level ever recorded for the world’s no. 2 cryptocurrency. Ether’s previous record was set on Saturday when prices crossed $518.

At press time, the coin was valued at around $513 for a gain of more than 8%. That gave ether a total market cap of nearly $50 billion. The cryptocurrency has added more than 4,000% this year, putting it among the world’s top altcoins.

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Trade volumes approached $2 billion over the previous 24 hours, which is equivalent to 118,000 bitcoin. Coinbase’s GDAX exchange had the highest turnover, with ETH/USD accounting for more than 9% of the volume. Bitfinex also processed more than 9% of ether transactions via ETH/USD. Meanwhile, Bithumb’s ETH/KRW cross saw 6% of the daily volume.

In all these cases, more than half a billion in ether was transaction.

Ether has successfully traded above $500 on several occasions, but has struggled to maintain those price levels. The previous record high was partly associated with the latest CryptoKitties craze, which promises frictionless trading of digital assets via blockchain.

Looking ahead, ether could struggle to break free from its recently defined trading range between $450 and $500. Although the market is slowly recovering from a congested network, record highs have been much harder to come by in recent months than other cryptocurrencies. By comparison, bitcoin has set multiple record highs over the same period. Several leading altcoins have also managed to climb to new heights on multiple occasions. Ethereum’s rally continues to be very much off-and-on.

Buterin Weighs In

Ethereum creator Vitalik Buterin recently compared the cryptocurrency market with the Salvator Mundi auction, which raised $450 million in November. The 23-year-old said growing interest in cryptocurrencies was “a reflection of the world at large. Buterin highlighted the growing popularity of CryptoKitties in sending his point across.

“I actually like the digital cat games,” Buterin said in a Dec. 4 tweet about CryptoKitties. “They illustrate very well that the value of a blockchain extends far beyond applications that would literally get shut down by banks or governments if they did not use one.”

Ethereum Use Cases on the Rise

Ethereum’s smart contract capability is being used by Switzerland’s largest banks to prepare for new European financial regulations. UBS announced Monday it has entered into partnership with Barclays, KBC and others to advance the MiFID II data collection initiative. The program will be driven by Ethereum smart contracts and run on the Microsoft Azure platform.

The combination of smart contracts and cloud will ensure banks can meet more stringent regulations on a common platform that will enable industry-wide reconciliation. Presently, these institutions must perform checks independently.

MiFID II will officially launch Jan. 3, 2018, and will replace the current regulatory directive.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

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Analysis

Technical Analysis: Litecoin Continues Surge as Bitcoin Tests Highs

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With the crypto world being focused on the historical futures launch, the major coins all enjoyed buying following a hectic weekend, and a volatile week as a whole. BTC itself got another boost from the widespread publicity and the volatile correction of the recent days ended, with the most valuable coin bouncing back towards its all-time high.

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While the long-term picture remains severely overbought, the short-term picture is not stretched and further gains are possible even amid the elevated correction risk. That said, investors should wait for a more favorable entry point to ad dot their holdings, while traders should control position sizes in the light of the long-term setup. Major support levels are now near $13,000, $11,300, and $10,000, with stronger levels still at $8200 and $7700.

BTC/USD, 4-Hour Chart Analysis

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The major altcoins are all up today, but only Monero and Litecoin are still within short-term uptrends, and the segment as a whole is still dangerously overextended, and a deeper correction is very likely in the coming weeks. LTC continued its recent break-out, getting close to the $200 level, and joining the extremely overbought group regarding the long-term momentum, and triggering a long-term sell signal in our trend model. Key support levels are found $100 at $75 and $64, with a weaker primary level at $125.

LTC/USD, 4-Hour Chart Analysis

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