Are Futures Driving The Price of Bitcoin?

Cryptocurrency experts often debate whether the introduction of bitcoin futures in December 2017 had any significant impact on the price. 

It is our opinion that, yes, the introduction of bitcoin futures had a significant impact on the price. In fact, the introduction of bitcoin futures on the Chicago Mercantile Exchange on December 17th, 2017 coincided with the end of the bitcoin bull run that occurred in 2017.

This article will explain why bitcoin futures drive the price of bitcoin. We will also offer some insight into the future price of bitcoin using this information.

What is Bitcoin?

Most of you are probably well aware of Bitcoin and how it works. However, it’s still worth mentioning the cryptocurrency for those unaware. Feel free to skip this section if you’re well versed in the mechanics of Bitcoin.

In simple terms, Bitcoin is a decentralized currency that was founded by an anonymous man using the pseudonym Satoshi Nakomoto. Bitcoin operates a little differently than standard currencies, though.

All transactions are placed on a public ledger called the blockchain. A transaction occurs when a user sends bitcoin, that’s the token of the blockchain, to another address on the blockchain. 

That is all fairly standard. The big difference is that cryptocurrency has no central authority governing it. No state, company, or individual can stop a transaction nor can transactions be reversed. 

This is possible because the blockchain is powered by individuals confirming transactions by running a script on their computer. The reward for powering the blockchain is some bitcoin. This whole process is called mining bitcoin. 

Finally, and this is what makes Bitcoin so great, the reward for mining bitcoin is halved after every 210,000 blocks of the blockchain are mined – there are a total of 21,000,000 blocks. That means the new supply is reduced by half to what works out to be every four years. 

Now, those are the very basics of Bitcoin, but that should give a good enough understanding to understand how it works in relation to a futures market. 

One more thing, you may have noticed that the mechanics of Bitcoin operate similarly to gold – mining blocks, limited supply, and so on. That’s not a coincidence that Bitcoin is so similar to gold because it was designed as a sort of digital gold. 

With that in mind, Bitcoin can be modeled in a similar, but not identical, manner to gold. 

What are Bitcoin Futures?

Futures are a derivative financial product that operate similarly to option contracts with one key difference. Futures contracts obligate both parties to conduct the financial transaction outlined in the contract on the specified date for the specified price. 

As you probably know, option contracts give the purchasing party the right but not obligation to execute the contract. 

It’s a small, but extremely important, difference. 

Anyway, futures contracts are available on pretty much every tradeable commodity, stock, or asset. It shouldn’t surprise you that bitcoin is, in fact, traded on futures markets. 

This means that individuals can conduct bitcoin transactions with terms planned out today, but for transactions in the future. 

How Bitcoin Futures Drive The Price of Bitcoin

Bitcoin futures drive the price of bitcoin in one simple way – it puts pressure on the market to perform in a certain way.

For instance, if people see that bitcoin futures are down, then they are much more likely to sell their bitcoin. The reverse is true if bitcoin futures are up in price with people much more likely to buy.

This creates a sort of self fulfilling prophecy with the futures market actually causing the future to come true.

This was most evident in December 2017. Bitcoin bears were talking about how Bitcoin was doomed, it was a pyramid scheme, Tulip Mania, and all kinds of other fear, uncertainty, and doubt (FUD).

Is it any surprise that the same day Chicago Mercantile Exchange released the first bitcoin futures that bitcoin hit its last all-time high for nearly three years?

Probably not.

Fortunately, the inverse is true for futures markets. This means that a positive futures market can put some positive force on the price of bitcoin.

That’s good news.

That said, bitcoin futures do not have as big of an impact on the price because there is no opening bell in cryptocurrency. The market is open 24/7. 

An opening bell, like the one found on every stock exchange, has a tendency to create a bit of a race at the beginning of the trading day. The closing bell also creates a race as traders look to exit positions for fear of holding a stock overnight – a favorite time for companies to release bad news.

Bitcoin Price Prediction 2021

Finally, our price prediction for Bitcoin in 2021 is somewhat bullish. The futures market for Bitcoin still looks good despite a recent jump to nearly $60,000. And the emergence of DeFi has further propelled Bitcoin and cryptocurrency to the mainstream.

That said, cryptocurrency is volatile and no one knows the future. Additionally, there will be a crash, just like every Bitcoin bull run.

That’s for the short term, though. Bitcoin looks great in the long term.

Final Thoughts

To answer the question, futures absolutely drive the price of bitcoin by creating a market force on the price beyond the normal media manipulation. And bitcoin futures are here to stay.

It is simply something that bitcoin holders, just like all commodity holders, will have to deal with when holding the underlying commodity.