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They help set prices. Further Reading: How Does Something Like Bitcoin Happen? Shorting is often a thankless job since most markets move higher the majority of the time. My theory was that a flood of institutional capital could propel cryptocurrencies to the moon.
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But before futures were available there was no simple way for traders to short bitcoin. Im not placing all of the blame in the fall of bitcoin on futures traders.
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I wouldnt recommend short selling to ordinary investors because its probably the most difficult investment strategy there is but those professionals who focus on this style of investing do provide healthy market dynamics on the whole. I never bought the constrained supply idea since there are thousands of other cryptocurrencies but the addition of futures to this market means that there are marginal short sellers who can take the other side.
While institutional asset allocators still havent warmed up to the idea of investing in crypto, the big change that happened in December was the rollout of futures trading. Of course, it could just be a coincidence that professionals were given the option of going both long and short using futures contracts at the height of the crypto insanity. Obviously, futures can be used for going long bitcoin as well and its never that simple with these things, especially with a market like this which was driven exclusively by psychology.
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Maybe these exchanges rushed these offerings to the table because the demand was so high for other ways to trade this stuff. The prevailing wisdom at the time was that futures trading was going to be the catalyst for the next leg higher. The buy-in from the endowment, foundation, pension, family office space hasnt quite happened just yet but bitcoin and the alt cryptos did see a huge ramp over the next couple of months. Its uncanny how the start of a futures market in this space coincided with the peak of the price following the holiday surge in November and December: The cboe offered futures contracts in mid-December which was followed roughly one week later with futures on the.
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I tend to look at these things from the angle of an asset allocator since thats where Ive spent my entire career but there is another angle to the institutionalization of this space, namely price discovery. They call out fraud situations. In October I pondered what could send the price of bitcoin into the stratosphere. Short sellers can be abusive at times but thats true of many types of investors. But you cant discount the fact that price discovery likely played some role in the fall of bitcoin through the introduction of futures, even if it was only from a psychological level.