Original Link | DailyReckoning.com by ZACH SCHEIDT
This is a historic week for what is already measured as the second most speculative bubble in financial history (and could be the first when all is said and done).
Today — well technically last night — Bitcoin futures were launched on the CME futures exchange.
What does this mean for the cryptocurrency that has been moving sharply higher in the final weeks of this year?
Well it means that today, Bitcoin is taking one giant step towards being a more transparent financial asset. And this will forever change the way investors and traders view this misunderstood currency…
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From Scarcity to Unlimited
Ask any true believer why Bitcoin should continue to trade higher, and you’ll get some version of the “scarcity argument.”
This argument simply states that there will only ever be 21 million Bitcoin created. And since the number of people interested in buying Bitcoin continues to increase — while the number of Bitcoin in circulation is capped — growing demand will continue to push the price of Bitcoin higher.
This sounds eerily like the argument made by real estate agents at the peak of the housing bubble in 2007. Back then, the phrase I heard over and over was “they’re not making any more land.”
Today, Bitcoin enthusiasts have a similar mantra… “They’ll never create more than 21 million Bitcoin!”
But this week’s launch of a futures market for Bitcoin actually changes that argument, and essentially removes the “scarcity argument” from the equation.
With the CME’s launch of a Bitcoin futures contracts, speculators can now bet on Bitcoin, without owning a piece of the actual currency. Instead, futures contracts allow one speculator to bet that Bitcoin prices will rise, and match that bet with a speculator who believes Bitcoin prices will fall.
So now, as long as there’s a speculator willing to take the other side of the trade — and there are plenty of people like me who believe Bitcoin will eventually trade lower — investors and speculators can invest in as much Bitcoin as they want.
Bye bye scarcity… And hello to a new transparent market!
How Will Bitcoin React to Futures Contracts?
In the first few hours of Bitcoin futures trading, the price has started to move higher. This morning before the market opened, Bitcoin was a bit above $16,000. But given the volatility in this cryptocurrency, the price could be $5,000 higher (or lower) by the time you read this.
The fact that Bitcoin initially moved higher when the futures contract was launched does not surprise me. The launch of this new contract now makes it possible for anyone with a futures-approved brokerage account to now speculate on Bitcoin.
(In the past, you could only buy Bitcoin through a process that confused some individual investors, and was off limits for most professional money managers.)
So this new contract initially creates more demand for Bitcoin because more investors now have access to bet on the cryptocurrency.
But as the futures contract picks up traction, the additional supply of virtual Bitcoin (as more speculators on both sides of the contract emerge) should give way to lower prices.
And keep in mind, now that futures contracts exist, bearish speculators will be able to bet against — or short — Bitcoin futures. That’s a feature that has not been easily accessible to traders until just now. And as those bearish speculators enter the market, it could cause some very sharp drops in the price of Bitcoin.
With this week’s launch of Bitcoin futures, my advice for serious investors remains the same…
Treat Bitcoin the same way you would treat any other speculative trade or investment.
It’s fine to take a flyer on something speculative — as long as you have plenty of capital to back it up. But you should never use investment money that you need for future expenses to invest in something speculative like Bitcoin.
In this market, the danger is still very high. And with the scarcity argument now null and void, the long-term potential for Bitcoin to rise is limited. I would much rather trade Bitcoin for short-term swings than invest in it as a long-term asset.