Over the past week, bitcoin has seen an extreme price spike after staying mostly stable for the last few months. At the time of writing this report, the asset is standing at around $4,958 with a 4.23% increase in the past 24 hours. But what has triggered this spike in bitcoin’s price? Gabor Gurbacs, the digital asset strategist at VanEck, has an answer to this question. He said:
CME Bitcoin futures expired last Friday. A large chunk of positions were rolled (buying) into the new front month BTC futures contract. Over the weekend, heavy spot Bitcoin and over-the-counter buying followed the Bitcoin futures contract expiration pushing BTC price up slowly and gradually. A
According to Gabor, it is the futures market of bitcoin that pushed up the price of bitcoin.
Futures contracts are essentially contracts of selling or buying an asset or a commodity at a specified time in the future on an agreed upon price. Bitcoin has its own futures market listed on CME Group Inc. and CBOE’s futures market for now. Both CME and CBOE provide options and futures exchange services in the U.S. The futures trading market of bitcoin holds a significant trading volume when it comes to the asset’s overall trading volume, as reported in a study present forward by Bitwise.
Trading in the futures market comprises of a huge chunk of the overall trading volume of bitcoin, it carries a huge role in directing the price of the asset. The recent price spike is also thought to have resulted from activity in the futures market. As stated by Gabor, the bitcoin futures listed on CME expired last Friday. This resulted in investors rushing in to buy the new front-month BTC futures, hence increasing the trading volumes of the asset. As the demand for an asset or its derivative increases, its value and price in the market also rise up based on the simple supply and demand mechanism.
As per the Bitwise report, the overall futures trading market of bitcoin on both CBOE and CME accounts for around $91 million, about one-third of the total bitcoin trading volume. This price spike suggests that the bitcoin price is highly prone to the movements of the futures market. But if futures market is that much significant, it may also stop bitcoin from gaining another bull run.
The futures market of bitcoin gives the investors the access to short sell. Short selling or shorting means betting against the trend of an asset. If bitcoin shoots up, investors can sell their futures contracts, thus increasing its supply in the market thereby slowing down the price spike. In this way, investors in the futures market can help keep the price of bitcoin from going out of hand.
Founder of BlockchainBTM, a crypto ATM operator in the United States stated:
This 2017 phenomena happened because there was no instrument for the speculators to short the market. Now that we have the future markets for bitcoin, speculators can short the market whenever it gets out of hand.
The recent bitcoin price spike just illustrates the power of bitcoin’s futures market which was previously thought to be too insignificant. Investors now need to keep in mind that the activity in the futures trading market can surely send out its ripples towards the asset’s price.