Bitcoin at a major crossroads

We don’t support any short-term positions in the Bitcoin market now.

Today, an interesting piece on CoinDesk discussed why derivatives might be needed for the Bitcoin market and how liquid derivatives markets might emerge for the cryptocurrency.

Any new bitcoin derivatives exchange will have to be electronic with 24/7 availability in order to mirror the existing spot markets for bitcoin trading. Just as with commodity exchanges that trade gold, silver, wheat and soybeans, warehousing partners will need to be established to accommodate the safe storage of bitcoin necessary for exchange integrity.

We can learn a lot about bitcoin futures exchanges by studying (…) predecessors, especially in the areas of customer support, liquidity and counterparty risk. Neither ICBIT.se nor MPEx (two derivative exchanges currently in operation) serve as a clearinghouse for their customers’ trades, which is an essential element of a formal futures exchange. Furthermore, verifiable volume reporting will be critical as these futures exchanges will most likely play an important role for bitcoin price discovery.

So, there is a market for Bitcoin derivatives and hedgers might actually enjoy a possibility to lock in their Bitcoin price. On the other hand, existing derivative exchanges are far from perfect, particularly when it comes to the safety of funds.

All this might also be interesting for investors since derivatives offer the opportunity to bet on price declines. While currently one might have a hard time finding a secure venue for short selling, the development of derivative exchanges with clearinghouse facilities would make going short a lot easier.

Derivatives also offer leverage since you only have to cover part of a value of a contract. But this is a double-edged sword — it might be risky if you don’t know what you’re doing. Only experienced traders should rely on them.

Overall, there’s need for Bitcoin derivatives since they might not only serve the purposes of hedgers, but also provide a liquid market with shorting opportunities. Having said that, much development is needed before we see Bitcoin derivatives exchanges up to the standards of those quoting commodity futures.

Let’s have a look at the charts today:

Yesterday, Bitcoin declined 1.6%, a first day of declines in four days. The move took place on relatively high volume. This move was fairly volatile with Bitcoin going to almost $600 (solid green line on the chart), then declining to $550 and rebounding to around $575. This was an important day since it pointed to a possible pause or decline in the recent rally. Also, the price stopped shy of $600, a bearish indication.

Yesterday, our best guess was that Bitcoin would consolidate between $500 and $600. Today has confirmed this, with Bitcoin going down 1% on relatively weak volume (this is written before 10:00 a.m. EDT).

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