The Federal Reserve Bank of San Francisco recently issued a letter that blames the significant price decline of Bitcoin from just under $20,000 to under $10,000 on the release of Bitcoin futures.
The Fed authors said that the “launch of Bitcoin futures allowed pessimists to enter the market, which contributed to the reversal of the Bitcoin price dynamics”. Previously, there was significant bias towards “speculative demand for bitcoin [that] came only from optimists”, which had allowed the price to increase relatively unabated. This changed with the introduction of Bitcoin futures by CME and CBOE, the authors argued.
The authors went on to discuss the difference between the speculative and transactional parts that make up the whole price of Bitcoin and other cryptocurrencies. They discussed how transactional price depends on its demand by the amount of people using the cryptocurrency, which is in turn affected by the different attributes that each coin offers. Interestingly they described said competition as “winner-takes-all markets”, despite they fact that Bitcoin currently has a market share of around 36%.
How do futures affect crypto adoption
Within the cryptocurrency world, one of the biggest goals is wider adoption and one of the biggest hurdles against larger adoption is volatility. Futures have the ability to solve that problem, but not in a clear cut way. Dash Force News continued a recent talk with Chris Rockwell, founder of RSI Advisors (an investment advisory firm in New Hampshire), about how futures, and synthetic futures, affect the crypto market. He started off by mentioning that “cash settled futures like Bitcoin futures on the CME and CBOE are purely synthetic markets (you don’t actually buy and sell the underlying asset – Bitcoin)”, which enables investors to “hedge against Bitcoin they own by shorting and they can go gain long exposure to Bitcoin”. He then expanded on how Bitcoin synthetic futures can affect the price:
“There is not a direct link between Bitcoin synthetic futures and Bitcoin but it does encourage more adoption of the underlying crypto which in the long run will affect prices. In other words buying or selling crypto futures themselves does not influence price but it does create different incentives and more potential users of the underlying [crypto] which does affect price.”
Chris did mention that “the critique he finds most credible against futures is that there is margin/leverage in them and that market may become larger than the real crypto market”, which can cause “incentives to manipulate the real crypto market”. Chris added that the market makers are “highly discouraged from allowing this to happen and are highly regulated exchanges but the incentive for bad actors to try that stunt are real.” These potential actions would help explain the Fed’s theories about Bitcoin futures causing the significant price fall even though the futures are cash settled and not Bitcoin settled. With that said, there are plans for Bitcoin settled futures to be introduced for investors. Overall, Chris added that “the more places and ways people can take a position in crypto the larger the market gets and the lower the volatility will go.”
Chris also highlighted how futures will increase merchant adoption, which is one of the top goals of cryptocurrencies.
“Crypto futures allow merchants and probably more importantly companies supplying the POS (point of sale) systems to merchants to hedge against crypto currency volatility and can lower the risk of adoption for merchants.”
Futures are often associated with the excessive risks of a flagrant Wall Street, but utilized correctly, they can properly hedge risks and make an investor’s life financially more sound. As cryptocurrency futures are introduced to more merchants and consumers, there will be wider adoption and risk hedging. Then the increase in merchant adoption and consumer use of cryptocurrency further “smooths out the volatility in price over time”. This cycle quickly becomes a virtuous circle that compounds to lower the long term volatility of crypto.
Dash is working to increase merchant and consumer adoption
There may not be widely traded Dash futures to help hedge risks, but Dash is working hard to increase merchant adoption and usability, which will lower volatility and thus lower risks. As Chris mentioned ever so eloquently, “Dash evolution is exciting for its potential to knock down so many barriers to adoption on the user side. Along with projects like AnyPay, Alt36, Kuvacash and Blockcypher knocking down barriers on the merchant adoption side, the Dash ecosystem looks like the strongest candidate to achieve true mass adoption of crypto.” The larger merchant and consumer adoption not only lowers volatility, but also hedges risks against a crash since consumers know that even if the price drops, they can still purchase goods and services at select vendors.
The Dash community has facilitated larger adoption on both the merchant and consumer side by maintaining low transaction fees, fast confirmation time, and security. Dash has been expanding merchant adoption across the world in Asia, Venezuela, Africa, and Europe. Dash is able to expand so widely and rapidly because of its unique governance and treasury system in addition to its decentralized and motivated entrepreneurial community. While the effects of exchange traded futures on cryptocurrencies are still being measured and a futures market for Dash seems like a distant prospect, Dash is making significant progress with merchant and user adoption to decrease volatility and hedge risks right now.