With the introduction of futures trading in Bitcoin the cryptocurrency market has gone into overdrive. Bitcoin itself made solid gains in the day after futures began trading, but now other major cryptocurrencies are also seeing fevered demand from those just entering the cryptocurrency markets. While there has been much said in mainstream media channels about Bitcoin and Bitcoin futures, there are 4 things you aren’t being told, and here they are in no particular order. Ignore them at your own risk.
1. Manipulation is Likely
Reports indicate that 40% of all Bitcoins may be controlled by less than 1,000 people. These are known as the Bitcoin “whales”. Smaller coins probably have whales that are even bigger than the Bitcoin whales. With the huge influx of relatively inexperienced and unsophisticated retail traders, some of whom are putting their life savings into Bitcoin, or taking out loans to invest in this highly volatile space, one thing is certain. The conditions in this asset are perfect for manipulation. Here’s another reason why this manipulation is almost certain.
2. Lack of Regulation
While Bitcoin futures are regulated, the Bitcoin cash market is unregulated. This allows for pump and dump schemes, for large Bitcoin investors to unfairly push prices both up and down, and for the probability of smaller investors getting rekt (crypto-speak for your account being wiped out by losses) when profit taking occurs. And with no regulation in the cash market, how can we believe that the futures market will be successful in doing what it has said it will do – lower volatility in the Bitcoin cash market.
3. Volatility is NOT Going Away
One of the main selling points of Bitcoin futures was that it would lower volatility for the underlying Bitcoin asset. It hasn’t done this in the least, and when looking at the rest of the cryptocurrency markets, which look like a manic buying spree currently, it has actually done just the opposite. Add to that the Bitcoin enthusiasts who are promoting Bitcoin hitting $1 million in the coming years. The thing that was supposed to reduce volatility in this market was the entrance of short selling in the futures market, but with a market such as we’re seeing who in their right mind would try to short Bitcoin?
4. Buying is Feeding more Buying
If Bitcoin continues climbing to $1 million and beyond, we have no problem. However, what happens if Bitcoin doubles or triples in value (not unusual in the past year which has seen Bitcoin gain roughly 1,600%) and then profit taking begins? If buying has been feeding buying on the way up, will selling feed selling on the way down as well? And if that’s the case, how fast and how far can Bitcoin fall, because this is exactly when the short sellers would step in, accelerating the drop in Bitcoin. Market sentiment can flip very quickly when investors see profits beginning to disappear, and it is a well known adage that markets take the steps higher and the elevator to the basement. Well, with Bitcoin taking a rocket higher, what will it take if/when it falls and how far can it drop?
What to do Right Now
Remain calm and rational. Keep a close eye on the markets and for any signs of cracks in the current rally, not just in Bitcoin, but in other coins such as Litecoin and Ethereum. Perhaps take enough profits to cover your initial investment so that you’re now effectively playing with free money. Watch for other opportunities, because the cryptocurrency markets are notorious for seeing money leave one coin and enter another coin enmasse.