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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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4.5 stars on average, based on 9 rated postsHira Saeed is a tech geek girl with a passion to write on latest technology trends. She is the Founder of Tech Geeks community in Pakistan and also runs her copywriting and social media agency, Digital Doers. Follow her on @heerasaeed.




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Analysis

Long-Term Cryptocurrency Analysis: Bitcoin and Ethereum Break-Out of Declining Trends

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The altcoin-led rally continued since our previous look at the long-term charts, and the major coins all confirmed a new short-term uptrend. Most of the largest digital currencies also broke out from their broad declining trends, as the total value of the segment is now more than 50% above the level around the correction low.

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BTC/USD, Daily Chart Analysis

The overall picture remained positive, with only Bitcoin’s weakness causing headaches for crypto bulls, as the most valuable coin is hovering close to declining trendline that dominated trading throughout the first quarter of the year.

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Despite the short-term weakness, BTC is still among the stronger majors from a long-term perspective, and with the secular uptrend clearly being intact, long-term investors should hold on to their coins and add to their holdings on the short-term pullbacks.

Crucial resistance is still just ahead between $9000-$9200, with further levels at $10,000 and $11,300, while support is found near $8400, $7650, and in the $6150-$6250 zone.

ETH/USD, Daily Chart Analysis

Ethereum built upon its recent relative strength, and the coin broke out convincingly above the declining trendline, and reached the next key resistance zone between $625 and $640 before the momentum of the move stalled.

While there are still several strong zones ahead, with the closest ones near $725 and $845, barring a quick move back below the declining trendline, the coin should continue the advance. With the long-term MACD still just in neutral territory, long-term investors could add to their holdings during short-term corrections, with key support levels at $500, $450, and $400.

(more…)

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

Crypto Update: Coins Hit 6-Week Highs as Rally Continues

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Bullish price action is still dominant in the cryptocurrency segment today, despite the recent lofty gains, and the overbought short-term picture in the ace of most of the majors. Correlations continue to break down, as more and more coins are in confirmed uptrends, with the total value of the market hitting $400 billion for the first time since early March.

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The top digital currencies are mixed today in the generally positive environment, with Bitcoin Cash, IOTA, Ethereum Classic, Dash, and Monero showing relative strength, in the face of the slightly overbought short-term momentum readings. While this is not the best moment to enter new short-term trades with regards to the majority of the coins, the long-term setup favors further gains in the coming weeks.

BTC/USD, 4-Hour Chart Analysis

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Altcoins have been leading the market higher in the last couple of weeks, and Bitcoin is still stuck below the $9000 level, as it continues to slightly lag behind from a short-term perspective. The coin ran into the strong resistance zone between $9000 and $9200 after breaking out of the broad declining trend.

Now a pullback is likely, given the slight weakness, with a possible test of the prior swing high at $8400. In case of a bullish move, the next target is at $10,000, and long-term investors should still add to their holdings on the short-term dips.

ETH/USD, 4-Hour Chart Analysis

Ethereum kept on creeping higher to marginal no rally highs in the last couple of days, nearing the $650 level despite the overbought short-term picture. Short-term traders should still not enter new positions here until the overbought readings are cleared, while long-term investors could still add to their holdings during the pullbacks.  Resistance zones are ahead near $735 and $780, while primary support is between $555 and $575.

Altcoins Diverging but Bulls Remain in Control

XRP/USDT, 4-Hour Chart Analysis

As we noted, the correlation between the coins is lower than during the downswing, and that confirms the bullish price action in the segment. Ripple is trading in a consolidation pattern near the $0.84 level, and although the overbought momentum readings are not yet fully cleared, the trend is clearly bullish and a new short-term buy signal is likely in the coming days.

Among the other recent leaders, IOTA triggered short-term sell signal, reaching the strong resistance zone near $2.2. EOS, Stellar, Cardano, and NEO are consolidating their gains, while Dash, Monero, and ETC are trading slightly above last week’s highs, but traders shouldn’t chase them higher here, as a short-term correction is likely soon.

Stay tuned for our detailed long-term technical analysis coming out later on today.

Featured image from Shutterstock

Disclaimer:  The analyst owns cryptocurrencies. He holds investment positions in the coins, but doesn’t engage in short-term or day-trading, nor does he hold short positions on any of the coins.

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

Bitcoin and Gold are Trading Inversely With One Another

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Advocates of bitcoin often compare the digital currency to gold for its finite supply and store-of-value characteristics. While BTC hasn’t come close to dethroning gold as the world’s most trusted safe-haven, it has steadily outperformed bullion amid the latest recovery. This has some people asking whether virtual currencies are eating away into gold’s demand.

Inverse Relationship

Strategists have identified a strong inverse trading pattern between gold and bullion stretching all the way back to the fall, right around the time that cryptocurrencies rebounded from a China-induced selloff. As bitcoin and other cryptos surged, gold experienced a steep fall from a high above $1,351 in early September to a low of $1,241 just three months later.

As bitcoin cooled down in the new year, gold resumed its upward trajectory and eventually peaked near $1,370 at the end of January.

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Below are the charting patterns for gold and bitcoin going back one full year.

The latest divergence is easy to spot. Since hitting a settlement high of $1,360 on Apr. 11, bullion has declined 2%. Over the same period, bitcoin surged 27%.

Bitcoin’s oversized percentage move relative to gold is a reflection of underlying volatility in the cryptocurrency market. Crypto assets as a whole are but a tiny fraction of gold’s $7.8 trillion worth. That said, the digital asset class peaked above $830 billion earlier this year, making the case for a trillion-dollar market more believable.

Systemic Risks

Proponents of bitcoin’s safe-haven status generally agree that the cryptocurrency is well suited to outperform the market during periods of heightened economic and political instability. This is generally believed to be the period in which gold prices thrive. However, unlike gold, bitcoin has also outperformed during periods of relative calm.

The second-largest bull market in history started off as a positive for gold as prices crossed $1,900 a troy ounce in 2011. However, bullion hasn’t been able to hit anywhere near those levels ever since. Bitcoin, on the other hand, has been the world’s best-performing currency (if one calls it that) in six of the past eight years.

Although the charts seem to indicate an inverse relationship between gold and bitcoin, it’s much more difficult to prove that investors are swapping one asset for the other at any given time. There’s some anecdotal evidence to suggest this is the case but a lack of trading data makes it difficult to conclude definitively one way or the other.

Supply and demand factors must also be weighed in analyzing the price trajectory of both assets. Gold’s total supply is increasing by an average of less than 2% annually, according to the World Gold Council. At the other end of the spectrum, the final bitcoin is expected to be mined in 2140, with total supplies engineered to decline until that date.

On the demand side, gold has been losing its allure as investors continued to pile into stocks. In 2017, appetite for bullion fell by 7%, with gold-backed ETFs plunging to one-third of the previous year’s demand. On the other hand, bitcoin’s demand has skyrocketed as more traders noticed its meteoric rise.

One area in which bitcoin has an advantage over gold is non-correlation. As the above examples clearly demonstrate, BTC is not correlated with the broader market. Gold, on the other hand, is influenced by risk-off sentiment, geopolitics, interest rates and inflation, among others. At present, these factors may play into the hands of bullion as investors prepare for the new business cycle.

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.

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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4.5 stars on average, based on 344 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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