Friday’s bitcoin price fall, taking a rare break from its parabolic ascent, isn’t likely linked to events happening today, but rather one upcoming. Near the noon hour in New York, it was trading at $15,753 basis the US dollar, off 8.6% on the day. The move lower came after two key events. Analysts that spoke to ValueWalk, however, don’t view this as a major change in market momentum – not yet, anyway. What bitcoin traders should be watching closely is the introduction of bitcoin futures on Sunday, which presents institutional investors the opportunity to begin selling.
Bitcoin price fall: The trashing of bitcoin is not necessarily causing the price to drop Friday…
The implications of Futures Industry Association President Walt Lukken writing a letter to CFTC Chairman Christopher Giancarlo asking the regulator to pump the breaks on futures bitcoin contracts remains unknown.
The CFTC has approved plans by the exchanges, but Lukken had expressed concerns regarding that approval process and the systemic risks a bitcoin failure might place on the entire listed derivatives infrastructure. The clearinghouse methodology under which the system operates is essentially based on the concept of shared risk; a bitcoin disaster could easily spread to other industry players and contracts, is one concern.
Unlike many futures contracts, which, like the S&P 500 futures, have near 5% margin levels, the initial margin for bitcoin set forth by the exchange is near 35% — with some, such as Interactive Brokers, instituting a 50% margin level and only allowing investors to buy not sell.
Interactive Brokers founder and Chairman Thomas Peterffy took out a full-page ad in the Wall Street Journal questioning the introduction of bitcoin futures.
“I think bitcoin and other cryptocurrencies are great ideas. They should be allowed to be traded freely and used freely to find their appropriate role in the economy,” Peterffy told CNBC, pointing to the threat to the clearinghouses and the shared risk concept. “What I am objecting to is linking bitcoin and other cryptocurrencies by federal regulations to the real economy, which would happen if we were to clear bitcoin along with other products in the same trading house.”
Goldman Sachs, often a calm and moderating voice among the banks, is offering its institutional clients the opportunity to trade bitcoin futures, but they have also expressed concerns.
Bitcoin Price Fall: Watch for the impact of futures on the price of bitcoin Sunday
Strategists who spoke to ValueWalk didn’t specifically point to the FIA letter or the back and forth trashing of the cryptocurrency as a reason for its price decline.
But with futures set to start trading on Sunday on the CBOE exchange, the specter of institutional players coming in strong to sell, as has been reported, could be part causation for traders taking money off the table before the event with unknown impact occurs.
David Drake, founder and chairman of LDJ Capital in New York, said Friday’s reversal is just a matter of profit taking following a strong price run-up and touching the 18,000 level. He views the profit taking as a temporary pause in a continued uptrend. He is looking for $20,000 and follows the line of thinking from Michael Novogratz who has made $40,000 price predictions.
While bitcoin could reach the $40,000 level, a significant issue will be the volatility at which it achieves this goal.
Bitcoin analyst Mike Brown points to the recent hack of NiceHash, a bitcoin mining company, as potentially providing a reason for traders to take money off the table. “This almost certainly scared many investors off, at least temporarily,” he said, but pointed to a larger issue.
“The infancy of the Bitcoin trading infrastructure and the lack of a central exchange,” he pointed out. The spread between different bitcoin exchanges can be significant and is a sign that professional global market making organizations have not yet entered the field. “There is no rate-setting central bank for Bitcoin, different marketplaces all over the world are all trading Bitcoin at different prices.”
Whatever the cause for Friday’s sell-off, one thing is certain: all eyes should be on the impact of Sunday’s launch of bitcoin futures on the CBOE to see if, in fact, institutional money comes in strong selling the cryptocurrency.