The Chicago Mercantile Exchange (CME) announced a plan to launch bitcoin futures by the end of the year. The price of Bitcoin surged to a new record in response to the announcement. It was reminiscent of the dot.com era, when a dot.com stock would jump 10% if Maria Bartiromo merely whispered the name of the company on CNBC.
Ironically, the cheers for this new contract from the Bitcoin faithful could turn out to be analogous to chickens in the barnyard cheering at the appearance of Colonel Sanders. For those that aren’t sure about Bitcoin but interested in seeing what it has to offer – try websites like About Bitcoin to get a basic knowledge of how it all works.
GATA released an article about the new Bitcoin futures contract titled “So Long Cryptos.” I’m sure that editorial stance puzzled most Bitcoin price-momentum chasers. Crypto aficionados, for now, overlook the fact that CME futures are used aggressively to push around the dollar-based Comex gold and silver futures contracts.
As GATA points out, the ability to manipulate precious metals futures contracts by the official entities motivated to suppress the price of gold is reinforced by the volume trading discounts given from the CME to Governments and Central Banks who trade on the CME.
If there any reason to assume that the same volume discounts will not be extended to the Bitcoin contract? Another curious feature of the Bitcoin contract is that it will be settled in cash. I would point out the original intent behind futures contracts was to enable producers and users to agree ahead of time on a price that would be paid for the delivery of the underlying commodity associated with the futures contract. Futures were a financing tool intended to facilitate the production and distribution of the underlying commodity product.
The Bitcoin futures contract is settled only in cash – U.S. dollars. To wit, does this not theoretically sabotage the intended purpose of Bitcoin, which is to provide an alternative to fiat currencies? Why would you want to receive fiat dollars rather than delivery of the underlying?
Technically this is not a bona fide futures contract. It’s a derivative of the “index” price of Bitcoin but it does not facilitate the production and distribution of Bitcoin. As such, it’s an instrument of pure speculation. By definition, this opens the door to manipulation by the entities who might be motivated to control the price of Bitcoin. Oh, by the way, those entities can buy and sell the contracts at a price advantage to the speculators by virtue of the volume discounts.
At least with gold and silver contracts, the contract enables the contract owner to take delivery of the actual physical commodity connected to the contract. To a limited extent, this mechanism serves to prevent the complete unfettered manipulation of gold and silver via the Comex futures contract.
With the Bitcoin futures contract, the contract owner is paid cash. The absence of a requirement to deliver actual Bitcoins enables the issuance of an unlimited number of fiat dollar-based paper Bitcoin contracts which can be used to drive the price lower by increasing the supply of the contract relative to the demand. So much for the idea that Bitcoin supply issuance is firmly capped. This could actually be quite entertaining to observe
It’s also quite possible that Bitcoin futures could divert hedge fund trading volume away from gold and silver futures. This is why many are deciding to learn from those similar to what you can find at https://bitcoinrevolution.cloud/about/ about how to trade cryptocurrencies. This would be a blessing in disguise if this occurs. The price-momentum chasing hedge fund algo trading enables the Comex bank manipulation of Comex futures contracts. Remove this source of volume and it will remove to some degree the ability of the banks to push the price around by exploiting the hedge fund algos.
If the percentage of open interest in gold and silver Comex futures contracts becomes skewed toward the users of these contracts who actually take bona fide delivery of the underlying physical gold/silver bars because the non-delivery-taking users move over to Bitcoin futures, it could mitigate the ability of the banks to price-cap the price of gold/silver.
In this regard, investors who prefer to keep their wealth stored in physical gold and silver rather than fiat dollars or fiat Bitcoins will indeed welcome the new Bitcoin futures product.
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Quick question– since it will be cash settled, how can these “bitcoin” futures contracts affect the price of actual bitcoin? What’s the connection?
Short answer – study gold for the last 15 years. Start with the archives at GATA.org
Excellent observations and analysis, Dave, as usual.
Oh gee…I thought it was impossible for cryptos to be manipulated! Who could had seen THIS coming?! I am shocked…SHOCKED I TELL YOU! (sarc)
Seriously, once again, thank you for your excellent analysis, Dave. However…it gets even more hilarious when you consider the following:
Since we’re dealing with a digital-ledger that is capped to begin with… the only SUSTAINABLE way to deliver your BitCoin futures contract for its intended “product”…is to drive down the value of BitCoin! Otherwise, how on God’s green earth are you going to produce the BitCoin at a profit!? With every commodity futures, you can certainly attempt to profit through more efficient means of production…but there’s none of that here! The costs of production can only GO UP! Therefor, someone at the CME must be pretty confident that he/she can bash the cryptos in whatever direction they like…but mostly down.
So basically this is OPEN SEASON on BitCoin for the present…in PERPETUITY…so that futures can be delivered! They’re settled in cash…so that makes it even EASIER for the shills at the CME to fleece their clients! They clearly think the average investor is as dumb as a bag of bricks…and good lord…it’s possible they’re right.
Since when will Bitcoin prices be determined by the CME?
Who is going to establish those rules?
The only way to manipulate Bitcoin lower is to buy it in sufficient volume to be able to sell it at critical technical junctures & then pray others sell enough so you can buy it back at lower prices to repeat the process. A precarious gamble given the many worldwide Cryptocurrency exchanges setting prices 24/7.
In addition, I believe many if not most people are just going to buy & hold their Bitcoin through any volatility, which historically has proven to be short-lived.
Finally, I believe Cryptocurrencies are ushering in an era of honesty in virtually all transactions. So, the CME & its naked short-selling antics will be history.
Ok – guess we’ll just have to wait and see. But before you vomit up the “supply of Bitcoin” argument, I suggest you study IN-DEPTH the history of Comex gold/silver futures vs supply
“Finally, I believe Cryptocurrencies are ushering in an era of honesty in virtually all transactions. So, the CME & its naked short-selling antics will be history.”
Every bubble has its undying faithful who will figure out a way to rationalize anything
The real question is, where it the control of the price ” discovery ” mechanism.
if shorting gold can drive the price down because too few traders actually demands delivery
instead the longs must settle the loss in cash, as the “price ” suddenly drops usually late sunday night in asien trading.
But if you/they/CB short bittycoins/shittycoins then they either have to ” buy” or pretend to have, and then settle in cash on expiry date….The
Perfect scam to control price….
The western worlds new way of fleecing and plundering the third world.
South Africa was the worlds largest gold producer for many years, but Barrick and others just shorted the metal and made a loss to defer taxes, and fleeced share holders that thought they were exposed to gold.
so now S.Africa is broke but still permits foreign miners to provide jobs…
mining their national recourses and accepting paper money, just like the Indians of America accepted glass beads and whiskey.
They should just stop mining and buy bitcoins…
Does the world need more gold..??
The whole point of buying a gold coin and actually selling dollar etc, is to avoid papers devaluing….a.k.a Zimbabwe , Venezuela , and even the swiss franc lately.
there are no markets…only fraud infinite fiat ..
Wake the fuck up….or loose your life savings.
There is already evidence that Bitcoin is manipulated via several exchanges through self-trade methods. Remember, anyone can register as many IP addresses to the block chain as they like, and open as many accounts with said exchanges, so this was bound to happen. Simply put, the crypto-market is not nearly as regulated as the other bonafide markets…and those are already rife with corruption as it is!
I haven’t studied Bitcoin, cryptocurrencies, or blockchain. I’ve read a lot of blog articles but not scholarly articles. I have a BS in a science field, and am a licensed doctor. I had to pass a lot of tests and board exams, but this is humbling; I must be a financial mental midget. I just don’t understand the excitement about a non-bank/non-government crypto. I get the “outside the system” aspect, but I think at some point government[s] step in to reap taxes [and prosecute for tax evasion & collusion to defraud + other charges]. I can’t see government allowing a competing currency without trying to control or regulate it. I think there will be taxation regulations revealed by the time the CME launches Bitcoin futures [the end of the year?].
If the CME futures market is NOT for the purpose of controlling Bitcoin prices, then it HAS to be for diverting $ away from gold futures market…where they might actually have to default on physical delivery one day.
Blockchain technology isn’t going away like email isn’t going away. But for people to think one particular crypto [Bitcoin] is so wonderful and has a stellar future..I think not.
You are far from a financial mental midget; you’re just beginning to realize how crazy the hype really is. Here, let me help.
The banking system uses merchant-services to verify digital cash-settlements, and those merchants get a cut of each transaction. But suppose you were such a merchant-services provider, and you wanted to pay your employees absolutely NOTHING for processing the settlements? You could offer them scripts…but scripts are redeemable for actual goods from yourself, so there’s liability in that. (BTW, scripts are not necessarily evil if done honestly).
Instead, you base your cash-settlement system on a pool of limited points, and then promise your employees a cut of said points (depending on how much they process) on the promise that they are just as good, if not more valuable, than the cash that is flowing through the system. Now you can pocket more of the cash for yourself, while the rest are sucked into a veritable ponzi-scheme of your design.
Substitute “Cryptos” for points and “blockchain” for merchant-services…and you’ll finally see that it’s a system that profits exchanges and ruining both “miners” and crypto-holders in the long run…and especially since anyone can make their own @&$#coin.
Coinbase signed up 100,000 new users…today!
I’d be nervous if I was in the gold business or the banking business. While the gold people talk of bubbles and collapses with wait and see attitudes, the rest of us are making money hand over fist…will put luscious profits in silver.
“Making money hand over fist” – famous last words of “portfolio insurance” prophets in 1987, dot.com gurus in 1999 and home flipper in 2007. 99% of those who chase bubbles end up losing money. Good luck
Be careful, Nancy; you might wind up WORKING for those gold holders one day. You can celebrate your gains, but it’s foolhardy to mock those who deal in the same realm of risk as you do…especially since they are affecting the world of real goods and services. And some of those services put FOOD on your table, btw. What you’re doing is, at best, gambling…so I am far from impressed.
I anticipate that when this historic, everything, everywhere, Ponzi collapses, credit as we’ve known it will disappear. If it’s available, it will be strictly local and conferred only to the trusted and known, who can post collateral. So given that money today is essentially debt, what is going to be the medium of exchange for transactions, other than barter, when credit disappears? Bitcoin? I don’t think so.
That’s when the age old criteria for money reasserts itself – tangible value, scarcity, transportability, divisibility, and universal appeal. And to those, I’ll add weighty – as in the pocket. I know of only two elements that fit that bill.
Gold? Bitcoin? I still believe that if you need to eat and
drink that barter will win out. If I’m well stocked with food
water and a means to defend it, I won’t want gold and silver
for my survival. Gold and silver for larger transactions, alcohol,
chocolate, tobacco and OTC medications for trading. Can you
imagine doing a trade of a 750ml of Jack Daniels for 15 gallons
of gasoline? People need to start thinking more in those terms.
It might only take a pint of JD to get 15 gallons of gas
If they can drive down the price of Bitcoin – woohoo …. another buying opportunity! Bitcoin is going nowhere but up