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Be Wary of the Bitcoin Futures Swings

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January 28, 2020 | 

1457 Views | 

Joanna Newman | 

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One of the big questions for many people attempting to jump into the cryptocurrency markets is what effect, if any, Bitcoin Futures will have on the price of their coins. For regulated markets, futures are a great way to play without having to actually buy a given commodity.

They rely on one party agreeing to buy X amount of the commodity sometime in the future, based on the current market price. The party on the other side of that transaction, then,
assumes all the costs of carrying said commodity throughout the term of the contract by holding onto it until the contract eventually comes due.

The Ins and Outs of Bitcoin Futures Contracts

What happens in most markets is that both parties are betting on the price either increasing or decreasing during the interim. When Bitcoin comes into play, the current unregulated nature of the cryptocurrency markets means that futures are potentially a gamble for both parties.

Unless, of course, one of them can game the system and ensure that the price of Bitcoin goes the way they want it to. Whales, or those who currently hold a large amount of Bitcoin and agree to sell to a given buyer at a later date, have the upper hand here and many people are currently worried about what that means for the market as a whole.

How Bitcoin Futures Contracts Affect Bitcoin Price

What some whales, in particular, are quite possibly doing is agreeing to futures contracts and then selling off a large number of their coins right before their contracts become due. This drops the overall price.

Which can end up being a significant decrease if said whale holds more than what is generally traded in any given day, meaning that the price of 1 Bitcoin can end up being much less than the amount agreed upon at the start of the contract.

Even though this is the case, the buyer is still on the hook for the higher price that was worked out earlier. This means that the buyer will end up having to pay more than market value, while the whale, capitalizing on the price drop, can then scoop up more coins at a reduced price, improving their overall portfolio while the buyer ends up being gouged.

The Drawbacks of Unregulated Markets

Basically, the ‘seller’ is betting on a short, while the buyer is stuck buying long. This looks like what has apparently been happening throughout January 2018 and has led to the
price of Bitcoin dropping rapidly right before these futures become due because of what could be market manipulation on the part of those who can afford to take on such a big risk. 

Regulated markets have a lot of protections in place to stop this manipulation from occurring, but Bitcoin markets aren’t subject to those same rules and, therefore, allow this
gouging to occur more frequently than in other markets.

Protect Your Investment

Being aware of large futures contracts, then, is a good way to insulate yourself and plan ahead, allowing you to better predict these swings and still come out on top.

With a market as volatile as those revolving around Bitcoin, swings are always going to be an issue, but being better informed of what the rest of the market is capable of will always help you protect yourself against unanticipated drops.

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