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Will CME and CBOE Change the Course of Bitcoin Trading?

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bitcoin trading

There has been a lot of media buzz in the investment world around the introduction of bitcoin futures trading. Two of Chicago’s major firms, namely Chicago Mercantile Exchange (CME Group Inc) and Chicago Board Options Exchange (Cboe), have announced plans for bitcoin futures trading on their respective platforms, with the latter already launching its contract on Sunday. While the main fear regarding future bitcoin trading at this point is price manipulation, investors are skeptical about how the whole situation will pan out.

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Fear of Price Manipulation

As mentioned earlier, price manipulation is a big threat to the profitability of bitcoin futures trading. According to the Commodity Futures Trading Commission (CFTC), they will only play the role of a derivatives regulator and not actually manipulate the underlying cash contract. Exchanges will continue to play a major part in handling the underlying cash contract, keeping it safe from the dangers of manipulation. Since the underlying cash market of bitcoin is not regulated, the CFTC has also warned investors about this fact.

Fig 1

Figure 1: Hypothesised Daily Trend of Bitcoin Values

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The Role of CBOE and CME in Bitcoins Trading

The CBOE and CME both have been competing to become the market of choice in the United States. CBOE has already rolled out its bitcoin futures contracts, which they call XBT futures, with a limited free trading offer for the rest of the month for its customers. The rival CME group, on the other hand, is scheduled to release their version of hitcoin futures Dec. 18.

These announcements played a pivotal role last week, influencing traders and institutional investors to perform bitcoin futures trading in a more recognized and secure market. The price of a single unit of bitcoin was also affected, jumping from a formidable $10,000 to a new record high of close to $20,000. The main reason for this can be attributed to investors who understand that the exchanges will bring liquidity and price stability on an otherwise unstable and volatile cryptocurrency.

Here are just some of the ways bitcoin futures trading will change the course of bitcoin trading significantly.

  1. Risk: There’s no denying that bitcoin’s past has been marred by volatile spikes and crashes.  Some of these price changes have occurred over a very short period, enabling traders to recover their positions within a short period of time.  However, with the introduction of CME and CBOE futures trading, the United States markets might prolong the decline through the “domino” effect of selling futures trading.  Moreover, a snowballing effect through selling can affect the entire market.  The Futures Industry Association has already stressed on the bitcoin volatility issue and has requested for some form of “guarantee fund” to clear settlements to the community.
  2. Unstable Exchanges: Besides the CME and CBOE, the majority of bitcoin exchanges in the world come from unregulated markets without proper overseeing or supervision. This is problematic for traders since such exchanges form a reference point in price for the asset. Frequent outages in exchanges are a real threat to bitcoin’s price, often resulting in wild price swings. For instance, Coinbase and IG group, two famous bitcoin exchanges stopped trading on a Friday. As a result, bitcoin’s price shot up and subsequently crashed within 20 minutes.
  3. Increased Volatility: Futures markets work very differently than commodity markets, which draw in a lot of traders as well as speculators. When it comes to bitcoin, the recent Whipsaw in price is unfavorable for the introduction of new traders in the market at this point.
    The increase in speculation surrounding bitcoin price will result in even more price volatility if the number of traders is increased. Many people are of the opinion that the recent parabolic price curves will attract traders with added incentives to play with its price.
  4. Trading Profits: The aspect of trading profits becomes more complicated with the CME’s contract rules. CME’s contracts have price limits which are 20% above or below bitcoin’s reference price. This is done in order to curb unpredictability and regulate volatility.  The sole purpose of these price limits is to minimize the adverse impact of the cryptocurrrency’s wild price swings on futures markets.
    Economists, however, have stated that this might result in an opposite effect, where the trader’s profits are compromised significantly. This is due to the fact that the reference price of the whole bitcoin market is based on exchanges, which are largely operational in unregulated markets.  Such unregulated markets see frequent price swings in excess of 20%. This directly results in futures traders who will no longer benefit from the spike of a greater than 20% increase in bitcoin prices, at the aforementioned exchanges.

Side Effects of Bitcoin Futures Trading on the Market

The bitcoin market is poised to receive institutional money as a result of futures trading.  It will also open up various avenues of asset investment, as many funds that are currently prohibited from dealing in bitcoin-like alternative assets will also be able to participate in the trading exercise.
This, however, can be a major problem, as investors won’t actually be pouring their funds into the bitcoin market, but rather acquire synthetic derivates instead. No extra money goes into bitcoin itself, as these futures do not require ownership of actually bitcoins.

Final Word

The introduction of bitcoin futures trading in two major firms is definitely a blessing as well as a curse.  Both exchanges are seeking to exploit bitcoin’s popularity by attracting interest from Wall Street. Institutional investors have also been keen to trade the asset in a more recognized and regulated environment, which have also seen the increase in CME/CBOE shares by at least 9%. Normal traders are also required to pay higher than normal accounts to backstop their bitcoin trades and allow continued funding for their trade positions. However, it still boils down to the trader’s decision and his or her understanding of the movement of the bitcoin markets, which have in the past experienced significant and unpredictable volatility.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Analysis

Technical Analysis: Cryptocurrencies Start Week on a Quiet Note as NEO Shines

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The broad Bitcoin-led correction continued to dominate trading in the crypto-segment throughout the weekend, as the most valuable coin drifted sideways above the key technical level at $13,000, with dwindling trading volumes.

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BTC remains in a declining short-term pattern, although the digital currency still holds well above the mini-crash lows from December, spending almost a month now in the daily range of the year-end plunge. We still expect the largest coin to complete the current cycle with a move below the crash lows and the $10,000 level after the stellar rally of the previous months. Key support is still found near $13,000, with further levels at $11,300, $10,000, $9000, and stronger levels at $8200 and $7700

BTC/USD, 4-Hour Chart Analysis

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Altcoins also settled down across the boards with only a few coins registering strong activity. Ethereum and NEO have been among the coins making headlines, as the second largest coin continued to grind, higher still trading near its recent all-time high today. The price of the ETH token is moving in a short-term uptrend, in the face of the stretched momentum indicators, but we expect a meaningful correction soon, and long-term investors should wait for a more favorable technical setup before entering new positions, with key support levels at $1000, $850, $740, $625, and near $575.

ETH/USD, 4-Hour Chart Analysis

Ripple remained under heavy selling pressure in the meanwhile, as the oversold bounce of the weekend faded away and the coin got close last week’s lows again. As the short-term downtrend is intact, traders should stay away from entering new positions, while investors should wait for short-term sell-offs towards the main support levels at $1.50, $1.25, and $0.85 to add to their holdings.

XRP/USDT, 4-Hour Chart Analysis

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Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Analysis

Technical Analysis: Coins Rebound as Key Support Level Holds Bitcoin

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The $13,000 level in the price of Bitcoin continued to be the center attention of traders today, as the most valuable coin successfully tested the crucial support zone overnight, despite another brief dip below it. The other majors followed the subsequent bounce higher, with Ethereum pushing past $1250 once again, while Ripple reclaiming the $2 level.

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Despite the bounce, the short-term trend in Bitcoin is clearly bearish and the correction is still likely to continue, although the extreme long-term overbought readings are now cleared. We still expect a move towards the previous correction low near $11,300, with a likely dip below $10,000 before the end of the current cycle, with further important support levels are found at $9000, $8200, and $7700.

BTC/USD, 4-Hour Chart Analysis

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Ripple recovered slightly after nearing the $1.50 level and reaching short-term oversold readings, and the coin tested the primary resistance level at $2.1 yesterday in late trading. The currency remains in a strong short-term downtrend despite the bounce and the continuation of the correction is likely, although long-term investors could already accumulate new positions near the main support levels at  $1.50, $1.25, and $0.85.

XRP/USDT, 4-Hour Chart Analysis

Ethereum bounced of the dominant short-term trendline, but the coin remains overbought on all time-frames and we expect a trendline break in the coming days. That said, traders could hold smaller positions here with tight stops as a push towards the prior all-time high is still possible. Key support levels are found at $1000, $850, $740, $625, and near $575.

ETH/USD, 4-Hour Chart Analysis

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Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Analysis

Technical Analysis: Bitcoin Tests $13,000 as Hectic Correction Continues

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The cryptocurrency segment remained generally bearish in the middle of the week, as the Ripple and Bitcoin-led move spread to almost all of the majors, with even the recent leader Ethereum getting hit today.

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As BTC got smashed below the dominant rising trendline, a wave of selling pushed the coin under the key $13,000 level before a violent bounce started. Despite the bounce, the long-term picture remains negative, and we still expect a test of the correction low near $11,300 in the coming weeks, with a likely dip below $10,000 before the end of the current cycle. Further important support levels are found at $9000, $8200, and $7700.

BTC/USD, 4-Hour Chart Analysis

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Ripple got very close to the key support level at $1.50 today in early trading, and after the sell signal six days ago, the coin is nearing a neutral short-term signal in our trend model, and a more durable bounce is possible here. That said, the long-term picture remains bearish and further corrective price action is likely before the end of the current cycle. Despite the likely consolidation, long-term investors could already accumulate new positions on the short-term sell-offs near the main support levels at  $1.50, $1.25, and $0.85.

XRP/USDT, 4-Hour Chart Analysis

Ethereum’s rally topped out near $1350 for now, and given the now severely overbought long-term picture we expect the short-term trend to end in the coming days. With that in mind, although traders could still enter small positions near the trendline, correction risk is now high, and investors should wait for a deeper move lower before entering new positions. Key support levels below $1000 are still found at $850, $740, $625, and near $575.

ETH/USD, 4-Hour Chart Analysis

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Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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