Bitcoin: A Low-Hanging Fruit

Is this going to be the next big leg in price discovery or the beginning of the crash market skeptics have been warning against for the biggest cryptocurrency? Bitcoin is on its eighth straight day of advance, crossing the level of $15,000 with trading volume hitting in excess of $13 billion on Thursday, marking a new all-time high of 15,242 for the currency. The price action marks a gain of almost $3,513 in just over 48 hours. The price advance comes amid speculations of a likely correction given the consistent overbought conditions in the market but bitcoin just seems to be defying gravity.

Next big event for the crypto currency is the futures listing on the CBOE on December 10 and on the CME, a week later, on December 18. Both exchanges will be launching futures with different contract sizes but these contracts would be cash-settled. Now, what does this mean for the Bitcoin spot market and the price action going forward?

Currently, higher prices benefit all players in the market, big or small. However, dragging Bitcoin into the futures market poses a risk of big players opening doors to short selling hell. Futures markets make it possible to short in decent size with a lot of liquidity, thus affecting the price discovery in the underlying asset market.

And, the fact that the Bitcoin contracts are cash settled, this equips these said players with a near- infinite supply of dollars to make profits on the other side of the market. This will open doors for quant aggressive traders, such as hedge funds and algorithm-driven funds, to use this futures market to enter Bitcoin trading with high levels of liquidity (in dollars, not the crypto currency itself) for aggressive short-selling and knock the prices really low. After all, futures market exists for hedging against risk, both upside and downside, and thus players now have an incentive to be on the short side and make profits hedging against the upside.

Now, the big question is, what opportunities does this event present from a trading/investing standpoint? I see Bitcoin as a low hanging fruit from two perspectives in a near term trade setup. First, from my last article,

Bitcoin could touch 18K before December 10th

There is a lot of optimism in the market with players having access to new liquidity pools awaiting the futures launch. Given Bitcoin’s performance in the last seven trading sessions, specifically the last 48-72 hours, a price gain of another $1-2K doesn’t seem farfetched. Second, I do see a potential dip just after the futures start trading, a correction of up to 20-30%, which may present a good medium to long term opportunity to enter the market and/or build on long positions. I do see Bitcoin prices potentially reaching $25,000 by early next year.

Disclosure: Crypto currency is a very volatile space and risk is high. I hold Bitcoin in my wallet.

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