The cryptocurrency trading landscape is very different now than it was even a year ago. Around this time last year, optimstic analysts were predicting that the bear market that had begun to drag on for an uncomfortably long amount of time would soon end, and that the happy days of BTC “to the moon” would soon return.
Now, a year later, the bear market has continued to drag on and on…and on. Because it’s become so much more difficult for cryptocurrency traders to profit it off of trading assets directly, many have looked toward other methods of earning cash off of crypto.
One of the most popular methods of attempting to profit in the bear market is. However, concerns of market manipulation still plague the crypto futures space. Is this a valid concern?
What is Cryptocurrency Futures Trading?
Trading futures contracts is a kind of investment strategy that has much to do with risk management. When you purchase a futures contract, you make a prediction about what the future price of an asset will be. If you predict that the price of an asset will be lower at the time the contract expires, and it is, you make money; this is called “going short.” The opposite is true as well–if you “go long” on an asset, and your predictions are correct, you profit.
Different kinds of futures contracts also offer different amounts of “leverage”, meaning that contract buyers have the option to multiply your gains (or losses) exponentially. In the cryptocurrency world, futures contracts with up to 20x leverage are available–this means that if you win, you profit by 2000%. However, if your prediction is incorrect, your losses can be devastating.
It sounds a lot like gambling–and, in a way, it is. However, the futures trading market has grown into an industry worth many trillions of dollars. The primary reason for this is institutional involvement in the futures markets–futures trading is exactly the kind of gambling that banks and other large financial institutions can legally be involved with.
Indeed, “Bitcoin futures on CME or CBOE cash-settled markets allow traders to speculate on the future price of bitcoin without handling underlying assets, further allowing traders to buy and sell BTC without actually owning any,” explained Aditya Das, Analyst for Brave New Coin, to Finance Magnates.
“This distinction means crypto future markets are often characterised as ‘casinos’ because traders are capable of making larger gambles and bets, exaggerating potential gains or losses.”
Crypto Futures Alarmed Traditional Financiers
Still, for many instiutional investors, futures contracts were not nearly enough. Fear of market manipulation has kept a great deal of financial insitutions and investors away from the cryptocurrency futures markets. Before the first-ever crypto futures options were made available on CBOE and CME, panic spread throughout Wall Street and other parts of the financial sector.
In fact, Thomas Peterffy, CEO of major brokerage firm Interactive Brokers, that opening up a cryptocurrency futures market could trigger a financial crisis similar to the recession that took place in 2008.
get a bad rep. Some blame futures for the crash. Actually, was highly overvalued and seeing the professionals bet against it caused people to panick and sell.
What are Futures Functions?
— Fortuna | FOTA (@Fortuna_FOTA)
“If the Chicago Mercantile Exchange or any other clearing organization clears a cryptocurrency together with other products,” Peterffy wrote, “then a large cryptocurrency price move that destabilizes members that clear cryptocurrencies will destabilize the clearing organization itself and its ability to satisfy its fundamental obligation to pay the winners and collect from the losers on the other products in the same clearing pool.”
Market Manipulation is a Real Concern–But Not Just for Crypto Futures
Of course, it is certainly possible that manipulation could take place in the crypto futures market–and it may have already happened on a large scale.
However, the threat of market manipulation in the cryptocurrency world may not be any more or less real than the threat of market manipulation in traditional financial spheres. in June of 2018 after the CFTC discovered that it had been tampering with its financial reports for years. The bank’s alleged motive was to influence the interest rates on USD International Swaps.
Similarly, by the Attorney General’s Office for interest rate manipulation after investigative efforts were conducted in all 42 of the states that the bank has operations in. The fine also led to widespread investigation of the bank by the CFTC.
A third case involved Goldman Sachs. by the CFTC after attempting to manipulate a global dollar benchmark for interest rate products over a five-year period.
Here’s How Market Manipulation Could Work
If the contract is a cash futures contract (meaning that the entity that holds it is placing a bet on the price of an asset, and that the contract is settled in cash rather than the asset itself), an entity that holds a large amount of the asset could theoretically influence an asset’s price in a favorable direction.
Imagine that you have placed a bet that the price of Bitcoin will decrease 10 percent by the time your contract expires. If you have 200,000 BTC, you could sell all of them at once, which could trigger a noticeable drop in Bitcoin’s price. When smaller investors see that the value of their assets dropping, some of them will “panic-sell” their Bitcoins, which will trigger the price to fall further.
longest bear market in history. When will they market manipulation? use these methods to make money off of use. It all started with . We need to get rid of these Parasites. Just my opinion.
— Miami Crypto (@Gfernan33130787)
If the price falls as far as your contract predicted that it would, you will win your “bet”, so to speak. Additionally, you may have the opportunity to buy back the Bitcoins that you sold to sink the price in the first place, which are now available to you at a discount.
Some believe that the massive price bubble that formed in the cryptocurrency bubble at the end of 2017 was a direct result of price manipulation related to the launch of the Bitcoin futures contracts on CBOE and CME.
Suspects Bitcoin , Subpoenas Exchanges | Finance Magnates
— Adrian Brathwaite (@tarmedia)
But Don’t Crypto Futures Contracts Benefit from the Transparent Nature of Public Blockchains?
It is true that cryptocurrency networks are inherently transparent–each network has a public blockchain (a distributed ledger) that shows each one of the transactions that take place on it. Different blockchains have varying degrees of anonymity–for example, the Bitcoin network uses pseudonymous identities for wallet holders; other networks, like Dash, have additional layers of anonymity if they are desired.
Additionally, blockchains are stored across networks of computers, and are therefore virtually impossible to alter or otherwise hack–more than half of the computers that uphold a crypto network would need to be compromised in order for tampering to happen. Because many blockchain networks exist across hundreds or even thousands of computers, this would be extremely difficult.
However, because Bitcoin futures and other kinds of cryptocurrency futures contracts are traded off-chain, they don’t necessarily benefit from the transparent nature of blockchain technology. Indeed, it is impossible to know how much cryptocurrency a futures contract holders owns, and therefore, we cannot know what kind of influence any single entity may have over the price of cryptocurrencies.
If futures contracts themselves were tied to a public blockchain, however, the futures market could become at least nominally more transparent. However, in order to really achieve a more transparent market, the identity of each trader would still need to be attached to the blockchain in some way.
Whether or not cryptocurrency futures contracts benefit from identity transparency via blockchain, there is something to be said about the efficiency of working with cryptocurrencies or other tokenized assets. There are no time-consuming, costly interbank transactions involved in sending, receiving, or storing cryptocurrencies (unless, for example, the Bitcoin network is under a period of particularly high traffic.)
Crypto Futures Trading Volume May Have Already Overtaken Crypto Itself
Whether manipulation is a real threat or not, the cryptocurrency futures market has continued to grow and grow. Exchanges such as, Delta Exchange, and have conquered various corners of the market.
In fact, Anton Kravchenko, CEO and Founder of Xena.Exchange, told Finance Magnates that the crypto futures market has grown larger than the cryptocurrency market itself.
“Generally all futures dominate the direct trading, the trading volume of derivatives is 20 times more than spot instruments because trading of derivatives is usually easier, provides less cost and better liquidity,” he explained. “You can compare it to the trading of oil – there is a lot of volume in the futures, traders, asset managers and banks trade oil futures, but the spot market of oil is only for the real industry.”
CME’s Bitcoin Futures Overtake Coinbase Trading Volume For The First Time Ever via #
— Affiliyfuture 1 (@Affiliyfuture1)
As an increasing number of platforms and trading options become available, Kravchenko said that the influx of retail investors as well as regulated exchanges could lead to “cross-breeding” and greater market participation across the board.
Indeed, at the moment, “CBOE futures market has high portion of institutional investors while cryptocurrency exchanges are overflowed with retails investors,” Kravchenko said. “This is going to change as cryptocurrency exchanges will mature and provide products that are unavailable on traditional exchanges, so institutional flow will move to professional and licensed cryptocurrency exchanges for juicy profits.”
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