The Bitcoin-backed Futures (BTC) market has been a hot topic lately. And for good reason, the KRAKEN exchange reveals that this parallel market is now 4.6 times that of the “spot” BTC market. Which makes some people say that it is now the tail that wags the dog … So? What price drives the other?
What is a Future and a Spot price?
The spot price Bitcoin, Tesla stock, the euro against the dollar, a ton of corn… is just the price paid right now, right now.
The price of a Future backed by these same assets (tesla share, Bitcoin…) is a future price. In a month, two months, even more than a year on the oil market. Futures are therefore derivative products in which stakeholders agree to buy or sell an asset at a future date and at a price specified in advance.
Futures, originally, were contracts allowing producers to protect themselves against price fluctuations. They were a kind of insurance.
- In the case of a cocoa producer wanting to protect against any drop in price, the latter will SELL a Future contract to hedge. This contract stipulates that he will sell his harvest in 6 months at a price fixed at the time of the sale.
- In the case of a speculator on the contrary, anticipating an increase in the price of cocoa to come, the latter will BUY this Future contract from the producer. If the price of cocoa is much higher in 6 months, the speculator will pocket the difference.
The pricing mechanism for Futures contracts is the same as for any other market. It’s about supply and demand. Suppose there are more offers to sell than requests to buy, prices will tend to decline. Conversely, if demand exceeds supply, prices will tend to increase.
In other words, if Futures price Bitcoin lower than the Spot price when investors anticipate a long-term decline, and vice versa.
As the expiration date of a Future contract approaches, its price will tend to approach the spot price by arbitrage effect, until they have the same price on the day the contract expires.
But what price attracts the other? Is it the price of Futures that attracts the spot price, or the reverse?
It all depends on the size of the market …
The volumes traded in derivative markets have grown gigantic, much larger than actual trading volumes. Thus, those who price on the Futures markets have more influence than those who operate on the Spot market..
While operators operating in the Futures market are constantly pessimistic and offer large volumes of Futures contracts with a price below the Spot price, then the latter will tend to fall by arbitrage.
If you have unlimited funds, then you can constantly add a layer to attract the Spot market to you. It is not for nothing that the derivatives markets (the price of which is supposed to derive from the price of an underlying) have become astronomical. Realize that the Futures, Options and Swaps market is probably around a million billion dollars, if not more. That’s over 10 times the value of all stock markets around the world.
Is all this still unclear?
Nothing more normal. It’s not every day that we are introduced to the toys of investment bank traders. It’s a whole new world and it makes sense that all of this is difficult to grasp at first. But as with mathematics, it is by forging that you become a blacksmith.
Let’s explain things differently by drawing a parallel with stock market stocks. The number of shares is limited. When you buy a Total share, there must necessarily be someone willing to sell it.
It’s not the same in the Futures market. Take the Gold Backed Futures market, the COMEX. If an investor buys a Gold backed Future, he is not buying a Real Real Gold backed Future. In theory, yes, but the point is that those who sell Futures contracts (who undertake to deliver an amount of gold at a certain price at expiration) do not really own the gold … All of these Futures are backed by ridiculous reserves of gold. It has already happened that all Futures on the market represent more than 500 times the gold held in COMEX coffers …
Investment banks like JP Morgan, recently convicted of manipulating the gold market for 10 years .., can print as many new Futures as you want. And that without having to actually own the corresponding gold. The banks know that no one will actually ask for physical gold to be delivered because this entails very high costs …
This is not the case with Bitcoin which costs absolutely nothing to deliver compared to the barbarian relic. Never mind, the CME invented Bitcoin-backed Futures without delivering Bitcoins… !!! Yes, you heard that right, the CME, the world’s largest Futures market, has launched Futures without owning a single Bitcoin !
This is a shame because gold and silver are precious metals because they are rare. Unfortunately, this fundamental attribute does not influence the price formation on COMEX. In this market, they are pieces of paper in virtually unlimited quantity that are exchanged. This is a scam, there is no other word.
The manipulation of the markets is undeniable. Prices do not reflect the invisible collective wisdom of investors but the interests of large investment banks and multinationals who need raw materials at low prices.
Everything works with the algorithm and the printing press. Whoever has the biggest wins every time … And the recent condemnation of JP Morgan and other complicit banks is there to back up our point.
To summarize, international high finance uses Futures to manipulate spot prices. She manages to create huge volumes to encourage anyone to trust them blindly.
In the case of Bitcoin, it is a fact that the players in the Futures market are mainly institutional investors who tend to be downside most of the time. Visit our article WilShire Phoenix lays a pavement in the swamp of manipulation via Futures for more details.
KRAKEN report “The tail wags the dog”
The Chicago Mercantile Exchange, or CME, launched Bitcoin-backed Futures in 2017. The KRAKEN exchange did the math. He claims that “Futures volume growth is very different from that of the spot market.”
“From the second quarter of 2017 to the first quarter of 2018, spot volume increased sharply, from $ 58 billion to $ 570 billion, before dropping significantly to a low of $ 104 billion two years later. Since then, derivatives have completely replaced the spot market as the dominant market while spot volumes have failed to fully recover. The notional volume of derivatives has exploded from less than $ 6 billion in the second quarter of 2017 to over 1.7 trillion in the third quarter of 2020. “
Here are some other very illuminating graphics from the KRAKEN report:
“My take is derivatives are financial weapons of mass destruction. They carry risks which, although latent today, are potentially fatal. “
Bitcoin, like other markets such as gold and uranium, have been chained to derivatives. These allow sophisticated manipulation strategies facilitated by unlimited funds.
In the end, it may be best to ignore those Futures whose prices only reflect the wishes of the financial oligarchy. Because it is she who hides behind these markets to instill day after day chronic pessimism.
The banks have manipulated gold downward to prevent the masses from realizing this criminal inflation. Inflation orchestrated to maintain the system of debt slavery. They will continue their dirty work on Bitcoin.
Yes, except that debts are now reaching stratospheric levels... They can only be absorbed with rampant inflation. The flight from money will make Bitcoin the new international reserve currency par excellence.