Derivatives in action
Still happy about the 'mainstream' financial realm getting into Cryptos?
It is all about legalized gambling
Maybe you already know about the so called Binary Options. This is a financial instrument, according to some, but basically it is just betting. Like playing Roulette in a Casino playing for either all black, the price goes up, or red, the price goes down. "Rien ne va plus!" and there the little ball goes. You either win or lose the complete bet. It is not about really trading Bitcoin, for instance, but instead it is about gambling what the price will be. Big deal? Well, in a way it is. When it is being used as part of a market price prediction tool. Where traders will adjust their trading on. If a lot Binary Options are gambling on a lower price for Bitcoin BTC on all terms, than traders might decide to sell. But there are other derivatives for the Crypto market too.
Trading Futures for instance is creating a legal binding contract on the price developement of Bitcoin. Specify the date and then price and it is done. No need to really buy or sell the Bitcoin, it is a derivative. It is buying and selling the value that is defined in the binding contract. Basically it is another way to bet on a rise in price for BTC or a dip and make a profit on that future gamble. It is buying and selling contracts, where there are no real Bitcoin bought or sold. It can however have an influence on the price of the real Cryptos exchanges. If many futures are set to a lower price, like with binary options this might cause a price drop on the market for Bitcoin and all the attached.
Another form of price developement betting that is very popular are CFDs. This derivative makes it possible to gamble on the price difference, for a certain time and date. There is no need to actually own the commodity where the Contract For Difference {CFD} is created for. Here a speculator sets a CFD position where there is a gamble on a higher or a lower price. For this there needs to be a margin of the placed CFD position in the account. If this margin is 10%, for instance, than a speculator can bet with a ten fold amount. The difference in price then is settled. This can deliver high profits, but also cause huge loses. The CFD derivates market could be used as a market price developement predictor, that influences the real price of Bitcoin and other Cryptos on exchanges.
Automated trading
A lot of trading is done by so called 'bots', meaning the proces is mostly automated by smart software. These programmes could watch the derivatives prediction markets and put real sell offers on exchanges. Last call always for a human, in case there is something weird going on. But most of the time these botnets do their work at the the tick of a clock. There is however a danger that a market is going to get manipulated by these derivative prediction markets. When there are a lot of Futures that go for a lower price of Bitcoin BTC, Binary Options trend to a lower price and CFTs are positioned for a price drop then this could force the real price down. As the trading botnets its Artificial Intelligence {AI} could analyse this as an upcoming crash. Which could create an avalanche effect. There will be buying too in the meantime, but the trend will be moving down overall. Until the derivatives market speculators expect that some good news, for instance, might give Crypto trading a boost again.
For people that trade real Cryptos, the commodity itself, or just HODL their portfolio, these downtrend times can be really tough. As it seems there is not much they can do themselves to change it for the good. While others make a lot of profit just by gambling on a pricedrop of a certain commodity, like Cryptos. And as long as that is extremely profitable, after the price has been pumped to high levels before, it could go on for quite a while. Until the profits on betting for a pricedrop are no longer interesting. Then the pumps might be turned on to go the other way. And the botnets will start to buy on the real trading exchanges. This does not only work for Cryptos. The derivatives market and its manipulating influence on a real economy came from the mainstream financial realm. It is all about automated gambling on price developements and it can really can take an economy down.
This is not a How-To!
Recently I started to wonder why there was this huge pump at the end of 2017 and the crash of 2018. Where it seems that the Cryptos still not have hit rock bottom. Some think that Futures really can have caused this, yet praise it as they claim that it will make the prices of Bitcoin and the other Cryptos more stable. Which made my eyebrows rise quite a bit. So... The Cryptos realm, that was thought to be the alternative financial system, is now under control by derivative gamblers and the connected trading botnets from the mainstream financial system!? Somehow, with the economical crash of 2008 still fresh in mind, this does not sound as a healthy developement to me, for the Cryptos realm. Yet, it seems the derivatives gambling markets already are doing their thing. Which could in a way explain the ongoing downtrend for Bitcoin and the attached Cryptos.
It is weird to me this apparantly legalized form of gambling having an apparant destructive influence on the Cryptos markets. Yet all kinds of ruling apparantly needs to be applied to Cryptos. The high risks, extremely volatile, protecting customers and what not... Right! What about CFTs {Contract For Difference} then!? There have been people who lost a lot with those and getting into debt deep. But that is done legally, according to law & order. It is so bleeding obvious that it has become invisible to the many. Yet when it comes to Cryptos, well them tings are bad news. There are a few challenges with voltures now trying to control the Cryptos market by using derivatives for price manipulation. But I still think the Cryptos realm will be yet another step ahead. With developements like the Lightning Network getting real. At some point these developements will replace the old financial system. But in the meantime there will be some rough bumps on the road ahead.
Maybe I am wrong
This was a long read, I know, so I thank you for getting all the way to here. Also it has some technical stuff inside, which I am doing my best to explain in simple ways. Without doing too much damage to the facts. It is possible to write complete books about Futures trading. But, I am not writing this as it to be a manual for effective trading in derivatives. Or to explain how it is being used to create hedge funds. Because then I would have to explain what a hedge fund actually is. But you can find that at the worldwideweb yourself if you are interested in that subject. It can really help understand what it is all about when you learn what the words mean. For me it was trying to fit some puzzle pieces together and I could be right and I could be wrong. Or there is even more to it than meets the eye. It might be just that there is money to be made and Cryptos are now a part of that mainstream financial system.
Than this would mean that legislation is probably close around the corner. Cryptos getting the status of being securities and not so much Current Asset Tokens. To be treated as pure financial objects, not currencies to be legally used for payments, that might be one of the consequences that the system that be is moving towards. Yet I still do believe the Cryptos realm will move the alternative financial system forward as it still has some surprises up its sleave. It maybe was a bit too ignorent to expect the old mainstream financial system to throw in the towel in the first round. And there are probably quite a few rounds ahead. But they sure are not ignoring, or laughing at, Cryptos anymore. One attack after another by mainstream and so far Cryptos are still standing tall. And in the meantime, stay calm and HODL!
May the Cryptos be with us!
Rien ne va plus!
Image CC0 licensed courtesy of Angelo Giordano.