Bitcoin prices tumbled, printing below 13,000, just ahead of a long holiday weekend, which calls into question the ability for this new asset class to remain viable. Prices have declined more than 35% since hitting a high in early December. The plunge threatens to take the shine off what’s been an incredible year for bitcoin. One year ago, bitcoin was less than $1,000 and in early December it peaked near $19,700. The huge climb in the most liquid cryptocurrency has been driven by expectations that the currency would become more mainstream, and retail as well as institutional investors would begin to trade it.
The notion that bitcoin will continue to become more popular is evident by looking at the number of assets that have been created to allow individuals to trade the digital currency. In early December the Chicago Board of Options Exchange introduced a futures contract that mimicked the price of bitcoin. The following week the Chicago Mercantile exchange introduce their version of a bitcoin futures contracts. This week, the New York Stock Exchange applied for a bitcoin ETF. On Thursday, Goldman Sachs intimated that it would open a cryptocurrency trading desk. Many investors have already tapped forex brokers as you can trade bitcoin with iFOREX
Why is Bitcoin Heading Lower?
With the introduction of a futures market, traders can now short bitcoin which could not be accomplished before December. This means that there was a limited supply and strong demand and forced the digital currency in one direction which was higher. Now, traders can also bet than the price of bitcoin will go lower by shorting the cryptocurrency using futures contracts. A futures contract allows you to purchase or sell an underlying asset, and either sell it or buy it back at some date in the future. While the number of outstanding futures contracts are small, the CME is providing substantial leverage and each contract is worth 5-bitcoin.
The futures market is also beginning to provide liquidity to the bitcoin market. Prior to the introduction of futures most of the trades were for less than 1-bitcoin. With futures coming on the scene, institutional investors can now take a large stake in bitcoin trading, helping to provide liquidity but also move the market.
Could the Selloff Spread
There is fear that bitcoin will spark a contagion in the market if it continues to sell. So far, bitcoin has represented speculation in the markets as opposed to a currency that can be used to purchase and sell goods and services. The demand for bitcoin comes from people who are looking for a new way to speculate as well as, from people who are looking for an alternative currency. These are generally individuals from countries that have illiquid currencies that consistently devalue.
With new products coming on line to help the liquidity of cryptocurrencies the likelihood of a straight line move higher will drop as investors use futures contracts to help short the bitcoin market and take advantage from both rises and declines in the world’s most popular cryptocurrency.