Looking beyond the foreground….

Thursday 12th April 2018

Looking beyond the foreground….

Futures contracts are a recent addition to the cryptocurrency sector….

The Chicago Board Options Exchange (CBOE) went live with Bitcoin futures contracts in mid-December last year.

Just a week later, the CME Group (CME) – the world’s largest futures exchange – followed suit….

At the time, Bitcoin was trading close to its all-time high. It seemed like all you had to do to get rich was to buy as much of the cryptocurrency as you could afford, wait a few days and sell to the next willing buyer….

Many Bitcoin players, pundits and sideline observers saw the introduction of futures contracts as the catalyst that would lift the cryptocurrency to even greater heights….

But things seldom work out as expected. And that’s how it proved in this instance….

The introduction of Bitcoin futures contracts acted as the catalyst that has seen Bitcoin fall from $20,000 to $6945.26 this morning….

Given the opportunity to go long and short on Bitcoin, traders took the opportunity to call out what they clearly believed was an over-extended Bitcoin price. And it’s been downhill all the way ever since….

  • The catalyst that re-ignites the boom?

There are signs that market expectation is beginning to stir again….

This time it’s all about the possible emergence of Bitcoin-focused Exchange Traded Funds or ETFs….

Right now, over in the United States, the Securities and Exchange Commission (SEC) is in the process of soliciting public opinion on the potential introduction of two ETFs that would be listed on the NYSE Arca exchange and which would essentially track Bitcoin futures contracts….

The CBOE – remember they introduced futures contracts back in December – are lobbying hard for the SEC to approve the ETFs….

Of course, they have a vested interest. They believe those funds would increase interest in the trading of Bitcoin futures….

But non-institutional players are hoping too. The ETFs – if approved – would offer another way for investors to get money into the Bitcoin market….

And that might be the development that kick-starts Bitcoin back into the stratosphere….

At least that’s one potential scenario….

  • The industry has form….

Another could be that the introduction of mass-marketed ETFs will come to be understood as the nail in the Bitcoin coffin….

When it comes to introducing mass-marketed funds to ‘hot’ sectors just about to go cold, the financial services industry has form….

Does anybody remember BRIC? There was a time – more than a decade ago now – that you couldn’t open a financial newspaper without coming across the acronym….

BRIC stood for Brazil, Russia, India and China. And BRIC funds – which focused exclusively on investments in those four specific emerging countries – came to market in late 2007….

The financial services industry timed it just wrong. Within months of introducing these funds and peddling them to the mass market, the bull market in the shares of emerging countries went into reverse….

And soon afterwards, financial commentators across the board were talking the BRIC strategy down. Nowadays, the BRIC acronym is just a distant memory….

More recently, in the depths of the last bear market, ‘Absolute Return’ funds appeared on the scene – promising investors steady (albeit modest) returns regardless of the market climate….

These funds came to market and were widely peddled at exactly the wrong time. Just a few months later the second longest bull market in history got started – leaving ‘steady but modest return’ funds dead in the water….

  • History repeating?

Right now, Bitcoin is behaving very much like the Nasdaq behaved during the dotcom bubble 20-years ago. Morgan Stanley research published last month says as much….

Both the Nasdaq and Bitcoin rallied 250%+ during the most explosive periods in their respective price actions….

The difference is that Bitcoin’s big gains happened 15 times faster than was the case with Nasdaq….

And it is true what they say, the faster and harder the climb, the faster and harder the fall. It’s been carnage for Bitcoin since Christmas – losing about 70% of its value….

And, as you’d expect in that kind of bad weather, interest in Bitcoin (and cryptocurrencies generally) has waned….

During the bull year of 2017, 167 cryptocurrency-related funds opened for business. To date in 2018, just 20 have come to market….

The likes of Floyd Mayweather, Paris Hilton and Harry Redknapp – unheralded financial experts who were busy talking up cryptos ahead of Christmas – have fallen curiously silent. Even the newspapers have found other things to focus on….

Right now, Bitcoin looks like yesterday’s news – the whirlwind that blew itself out….

  • In the interests of balance….

But, in the interests of balance, think on this….

Prior to the current bear market, Bitcoin has experienced three other bear markets since 2009 – and recovered from each….

Granted, the current bear market is bigger and more significant (on the face of it) than the earlier versions – owing to the sheer scale of the drop-off in price….

But seasoned investors know that the road is never straightforward where new technology is concerned. And extreme ups and equally extreme downs are part of the terrain – to be expected….

People generally (and investors specifically) forget that household-name companies of today – companies like Apple, Microsoft, Google and Facebook – have all endured periods where their long-term viability as businesses has been questioned and the price of their stock has tanked….

Today those same companies are considered solid-as-a-rock. Indeed, it is hard to imagine life and work without them….

Perhaps Bitcoin will eventually re-establish itself in the same way. Or, if not Bitcoin, then some other cryptocurrency….

Don’t discount the possibility….

The headline price is always the focus. And, right now, Bitcoin is on the back foot – along with the rest of the cryptocurrency sector….

That’s the foreground situation. But in the background, things are happening, things are developing….

  • In the background….

Circle, a company in which Goldman Sachs holds significant stock, recently bought Poloniex (which operates a major cryptocurrency exchange that handles more than $2 billion in trades every day) for $400 million….

It’s a sign that the biggest bank on the block not only recognizes that cryptocurrencies are here to stay but is set on establishing active involvement at the top of the tree….

JP Morgan Chase, the big bank, has changed its attitude in recent times….

Last September, CEO Jamie Dimon described Bitcoin as a ‘fraud’ and people who invested in it as ‘stupid’. Then in January, JP Morgan issued a report that said this….

‘[Cryptocurrencies] are unlikely to disappear completely and could easily survive in varying forms and shapes among players who desire greater decentralization, peer-to-peer networks and anonymity.’

It’s a real change of heart. No longer ‘fraudulent’ or ‘stupid’, cryptos are now something investors should accept and get used to….

  • Major players….

Just this week Bloomberg report that George Soros is starting to take an interest in the crypto-sector. Apparently, an analyst on his family office team, has received internal approval to trade cryptocurrencies….

That’s a change of policy. One that suggests Soros is acknowledging that cryptos are part of the future….

And the Rockefellers are taking up positions too….

Via Venrock – a $3 billion venture capital fund the family owns – they’ve teamed up with Coinfund, an investor group which invests exclusively in cryptocurrency start-ups….

Slowly but surely, the big players are starting to take an interest….

And the big institutional money (capital managed by hedge funds, pension funds, insurance groups and the like) amounting to tens of billions could follow….

If, or more likely when, that institutional capital flows into the sector, cryptos will enjoy another boom time….

Bitcoin is still the number one crypto. And it would surely be one of the beneficiaries of increased institutional interest in the crypto-sector….

Bitcoin might be down for the moment. But it certainly isn’t out. Not yet anyway.

That’s how it looks from here….

All the best,

Dave Gibson

Money Truths