Bitcoin Futures: The Catalyst That Sends Bitcoin Price Soaring?
On December 10, the Chicago Board Options Exchange (CBOE) is launching trading in Bitcoin Futures; eight days later, CME Group Inc (NASDAQ: CME) is doing the same. These exchanges will allow traders and institutions to speculate on the future price of Bitcoin, as well as hedge against it.
There is growing chatter that a number of hedge funds are salivating at the idea of the opportunity to bet against the Bitcoin price using Bitcoin Futures. There have been a number of high-profile figures and pundits who have questioned the validity of Bitcoin as a currency, and Bitcoin Futures will allow them to bet against this cryptocurrency.
In my honest opinion, I think that betting against cryptocurrencies is going to be a very bad idea. Mind you, I am also a critic of Bitcoin, and I have expressed my concerns about the price action in Bitcoin, which has an uncanny resemblance to the tulip mania that took place in the 1630s. Let’s just say that the tulip mania ended very badly, which doesn’t bode well for the price of Bitcoin.
So, how can I be bearish on Bitcoin on one hand while suggesting that shorting Bitcoin using futures is a bad idea? Let me explain.
I believe that Bitcoin prices are going parabolic.
Parabolic trends are characteristics that are shared with price bubbles. The thing about bubbles is that the price will continue to rise at an exponential rate until it reaches a price so absurd, it borders on insanity—prices so high that no one in their right mind could justify them.
Just this week, Bitcoin’s market cap surpassed that if Citigroup Inc (NYSE:C), which means it is well on in its way.
Even at its current price, I believe that Bitcoin has a fair deal to climb before all is said and done. These beliefs were expressed in my report published on November 9, “BTC Forecast: Is the Bitcoin Price Destined for $60,000 or $600?” My price target was based on Bitcoin’s price chart, using a method called “parabolic extension.”
Higher Cryptocurrency Prices
The reason why I think Bitcoin will achieve this inflated price objective, beyond its current over-$15,000 price tag, is that its peer, Ethereum coin, has recently broken out of a technical price pattern, which suggests that much higher prices are on the horizon for cryptocurrencies.
This technical price pattern is highlighted on the following Ethereum price chart.
Chart courtesy of TradingView.com
The technical pattern highlighted on this Ethereum chart is a triangle pattern. These patterns are created when the price action is characterized by series of lower highs and higher lows. When you connect these series of highs and lows using trend lines, you create two converging levels of price support and price resistance, which create the triangle.
These patterns are resolved when the price either breaks above resistance or falls below support, which is a signal indicating that the trend will continue in that direction. On November 23, Ethereum coin completed this triangle pattern by breaking above resistance, and it suggests that higher prices are now on the horizon.
Triangle patterns are consolidation patterns that act as midpoints in a trend, which means the price action that preceded it can be used to forecast where the Ethereum coin price is heading.
The following Ethereum price chart illustrates the price action that preceded this triangle, as well as a forecast of where prices might go.
Chart courtesy of TradingView.com
This second Ethereum chart illustrates that the triangle pattern highlighted on the previous chart is a midpoint within a much larger bullish trend.
Bullish trends such as this one are constructive in nature. Constructive price action consists of an alternating sequence of impulse waves and consolidation waves, which are responsible for creating and sustaining a trend.
The impulse waves, which are highlighted in green, define the period in a bullish trend when the asset price makes a sustained move toward higher prices. These are usually violent and abrupt in nature, and it is where all the gains in a bullish trend are captured.
The consolidation waves, which are highlighted in purple, define the period in a bullish trend when the gains from the preceding impulse wave are digested and the price refrains from advancing. This corrective price action serves to unwind any overbought conditions that are present, in order to create the necessary environment where a new advancing impulse wave can follow.
The completion of this consolidation wave on November 23 suggests that a new impulse wave is now in development. If I use the same parabolic extension method that was applied to the Bitcoin price objective, it suggests that this impulse wave can carry Ethereum coin prices as high as $9,000. This parabolic extension is highlighted on the Ethereum price chart.
With an objective as absurd as $9,000, it is is not difficult to assume that, from its current price of $440.00, the price of Ethereum is likely to appreciate. Ethereum is the No. 2-weighted cryptocurrency, and higher Ethereum prices bode well for the prospects of a continued bull market in Bitcoin—and for all cryptocurrencies in general.
I believe that the introduction of the Bitcoin Futures contract is going to be the catalyst that ultimately causes Bitcoin to surge.
Just imagine a scenario in which all these prospective hedge funds have taken the opportunity with Bitcoin Futures to bet against Bitcoin prices, and the complex becomes net short. If the price of Bitcoin does not drop, as these traders have positioned themselves for, it will mean that losses will begin to mount as the price of Bitcoin continues to appreciate.
Once losses start to mount, this will increase the pressure on these hedge funds to unwind or hedge these futures contracts. That will require taking an opposing Bitcoin Futures contract (if one is available), or buying bitcoins outright.
The problem arises with the fact that Bitcoins are in limited supply, and finding large quantities in order to hedge a position will prove a difficult task. This creates a potential synthetic short squeeze of titanic proportions, in which the Bitcoin price can surge past $60,000 in short order.
Bitcoin Futures are set to launch on December 10, and there is chatter that a number of hedge funds are looking to bet against Bitcoin. I believe that this may turn out to be really bad idea, because I have reason to believe that much higher Bitcoin prices are on the horizon. Throw in the notion that the No. 2-weighted cryptocurrency, Ethereum, is primed for higher prices, and it reinforces the notion of a continued advance in all cryptocurrencies.