Wall Street is working to solve one of Bitcoin’s biggest problems: market volatility. And that could pave the way for the digital currency to become “people’s currency.”
Ie, gain broad acceptance among merchants as a medium of exchange.
Bitcoin has several advantages over traditional currencies. But it has one big problem, too. It’s price is highly volatile, making it unsuitable for day to day transactions.
That could explain why the digital currency has failed to reach the “tipping point,” reaching the market of massive users.
Wall Street is working to ease Bitcoin’s volatility by introducing Bitcoin derivative products. Like the Bakkt Regulated Bitcoin Futures introduced this week. As is the case with derivative products for other asset classes, these products allow Bitcoin holders to lock in Bitcoin prices, shifting the risk to of market fluctuation to other parties.
Wayne Chen, the CEO of Interlapse Technologies, believes that this is a positive development for Bitcoin. “The launch of a Bitcoin futures contract through ICE is a significant advancement for Bitcoin futures trading,” he says. “Bitcoin is deemed as a commodity by regulators and adding it into a futures contract is the right move."
Bitcoin futures aren't new to Wall Street. "Bitcoin Futures trading has already seen the spotlight in December 2017 through CME. Although trading was settled in cash rather than physical Bitcoins at the time, it provided an essence of legitimacy for taking Bitcoin mainstream. Ultimately, providing more comfort and assurance to investors,” Chen adds.
Still, the road to Bitcoin’s broad adoption may not be smooth. In fact, Wall Street’s Bitcoin derivative products may inject some instability into the Bitcoin market, before they bring stability.
That’s according to Ryan Uhr,CEO and co-founder of Coinplug Inc.
“A new opening of a BTC derivative market may have a negative effect on the BTC price in the short term because it gives traders more chances to bet on a price decline,” he says. “With no markets to provide short-selling opportunities (or something similar), only BTC holders can sell BTC, thereby negatively affecting the market price. Whereas, if people can sell BTC futures, they may get benefits when the price moves downward even without holding the underlying BTC.”
Simply put, the new products could turn into speculative devices. “It is going to be even easier to profit from BTC holders’ misfortune if a highly leveraged trading is available so that financing is less of a problem, Uhr says. “As there are more people with negative views or with enough BTC to distort the underlying market and try to exploit this opportunity, the BTC market will be more exposed to unexpected sells and its price will be less inflated on average.”
Nonetheless, he’s optimistic over the long-term. He thinks that the addition of Bakkt futures to CMM BTC futures, as well as offshore markets like Bitmex and Binance will bring confidence to the Bitcoin market.
“With the belief that the market will price BTC more accurately when more derivatives are available, and that there will be more windows through which firms and institutions can trade BTC officially, traders may grow to trust the market more, leading the market to grow faster with a stable pool of investors,” he says.
And that is definitely a huge plus for the BTC price in the long term.
Ie, gain broad […]