- Bitcoin Asset manager claims most firms looking to speculate on bitcoin will use derivatives market instead of the underlying asset.
- The market share of physical oil compared to oil derivatives plummeted when futures trading was introduced.
- ‘Financialization’ of bitcoin will distort its innate pricing mechanism. Don’t count on a halving pump in 2020.
The tendency for bitcoin to multiply in value following regularly scheduled halving events should not be relied on in 2020.
That’s according to a cryptocurrency asset manager who warned the bitcoin derivatives market may have wreaked havoc with BTC’s traditional pricing mechanisms.
Derivatives Break Pricing Mechanisms
Meltem Demirors, who oversees $1 billion worth of assets at CoinShares, said the introduction of derivatives has shifted focus away from the underlying digital asset.
Demirors says derivatives trading removes the ability for producers of a given product to set prices. She points to the inverse correlation between the rise of oil futures, and the steady decline of physical oil production.
…derivatives markets are a strange animal. Let’s take oil. This chart from @FT shows what’s happened to oil markets over the last 20 years. Derivatives dominate trading. Most firms trade paper contracts to speculate on the price of oil. The market is driven by speculation.
Worse still – the success of bitcoin as an investment vehicle may be the very thing that decalibrates its price-to-value equilibrium. If bitcoin becomes ‘financialized’ as Demirors warns, it loses any and all factors which once differentiated it from its fiat counterparts.
Regardless of the long-term effects of bitcoin’s burgeoning derivatives market, one thing that’s certain is the tendency for paper contracts to siphon trade volume away from the asset in question.
Opposite View: Could Futures Trading Be Good for Bitcoin?
With just under 150 days left before the next bitcoin block reward halving, is the situation really as bleak as Demirors suggests?
As one helpful Twitter user pointed out, the introduction of a gold futures market in the 1970s coincided with a massive bull run. The price of gold surged for an entire decade, resulting in an all-time high which still stands to this day.
The launch of a gold exchange traded fund (ETF) in 2005 also coincided with a bull run for the asset.
Other factors beyond derivatives trading will also play a part in shaping the value of bitcoin in the coming years.
Some view the steady shake-out of weak miners from BTC’s production as a positive sign for its future price. The reasoning being that small-scale miners are more inclined to dump their mined BTC for profit. However, this has the side-effect of further centralizing bitcoin’s production process into the hands of the resourceful few.
Others claim the halving price pump will arrive before the day itself, as miners scoop up BTC to sell later. This could result in a strong price increase in the lead up to the halving. But that would be followed by a stunted, or delayed, reaction to the halving itself.