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Bitcoin price surges after futures launch; continues to defy gravity

Bitcoin price briefly touched the $17,428 level on Tuesday, marking yet another fresh all-time high for the cryptocurrency, following the launch of the first bitcoin futures contract on the Chicago Board Options Exchange (CBOE) this week.

The launch was widely seen as a major step towards making Bitcoin – and cryptocurrencies in general – more legitimate as an asset class. Moreover, the move comes just one week ahead of the CME Group launching its own Bitcoin futures, while rumors suggest that Nasdaq plans to join in next year, further strengthening the case for making cryptocurrencies fully legitimate.

In an interesting turn of events, Bitcoin futures on the CBOE are currently trading at a notable premium over spot prices. Although the mispricing could be owed to a variety of factors – such as a lack of liquidity given how new futures contracts are – it could also be a sign that market participants expect Bitcoin to gain further in the coming months.

Moving forward, there are several events over the next few weeks to keep speculative investors busy, not least of which numerous “hard forks”. Although some of these may be cancelled or may turn out to be fake, it is worth noting that there are 5 “hard forks” projected to take place by early January. The general wisdom behind these events is that the cryptocurrency splits itself into two parts, giving the holders of the original bitcoins extra new coins for “free”. This occurred twice in 2017, with the owners of Bitcoins receiving Bitcoin Cash and Bitcoin Gold respectively, while Bitcoin prices also surged in the aftermath of both splits. Thus, with potentially 5 of these on the horizon, investors may look to hold more Bitcoins ahead of the forks, on speculation for a similar reaction.

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Having said that, however, I must sound a note of caution by reminding readers that not all forks are created equal, and that past performance does not guarantee future results. To explain, when a cryptocurrency undergoes a “hard fork”, a different version of that cryptocurrency is created, with the two sometimes becoming competitors as they share many similar characteristics. In some occasions, the newly-created competition can take some demand out of the original instrument. As such, even though the most recent hard forks proved to be beneficial for the original holders of Bitcoin and Bitcoin prices, this may not necessarily be the case for all the upcoming ones too.

In the longer term, Bitcoin’s direction may depend primarily on the prospect for creating Bitcoin Exchange-Traded Funds (ETFs), and on whether major governments will regulate cryptocurrencies. In recent weeks, there has been renewed speculation regarding the US Securities and Exchange Commission (SEC) finally approving a Bitcoin ETF – something it has rejected in the past. An ETF would make Bitcoin-related instruments more accessible to retail investors, increase further the legitimacy of cryptocurrencies, and likely add more fuel to Bitcoin’s rally.

On the other hand, considering that some expectations for an ETF may be priced in already, another rejection by the SEC may come as a disappointment to the market, and could cause prices to correct lower. As for regulation, UK and EU financial watchdogs recently stated they are looking to tighten the rules on digital currencies, amid mounting concerns over money laundering and tax evasion. If implemented, stricter regulation could dampen the appeal of cryptocurrencies in general and consequently, prove bearish for prices.

by XM Investment Research Desk