Wednesday, April 10, 2013

Bitcoin derivatives, unlike gold and silver cases, is a good thing

With the newly-forming markets for leveraging and shorting, bitcoin traders will have to be more like gold and silver futures traders.

The above is a tweet from the excellent Jon Matonis who has been following Bitcoin for Forbes since its inception with great insight. I’m sure that his tweet referring to news that institutions are now getting into the bitcoin game is giving some bitcoin boosters a few heart palpitations. Why? The early adopters of bitcoin like the fact that it is completely outside the professional traders and hedgies of Wall St. and City of London, so news that these guys have now discovered Satoshi’s baby is worrying. The clue as to why I think these fears are overblown is in the rest of Jon’s tweet. He makes reference to gold and silver and how they are traded on futures markets. On one hand yes, this is true, bitcoin derivatives are coming but I think we need to understand why, unlike in the cases of gold and silver, this is a good thing.

To encapsulate my argument succinctly: the quoted price for gold and silver are derived primarily from derivatives markets and this will not be the case for bitcoin.

When I asked professor Antal Fekete on the “Keiser Report” recently, ‘what is the current cash price of gold,' he looked at me quizzically because, technically speaking, there is no real current ‘market price’ for gold. The price quoted for Gold and Silver comes from the Comex futures market and is more ‘implied’ than actual. This is why it’s so easy to manipulate the price of Gold and Silver on Comex. You can borrow virtually any amount of money you want at virtually no cost and sell futures contracts all day until the price drops to the price you want (naked short-selling). It takes approximately 50 times more buy orders to move the price of Silver up $1 than down: these are all the Wall St. banks dumping naked shorts all day to keep the price low - as a favor to the Fed - who in turn keeps rates near zero - citing the ‘deflation’ apparent by the low cost of things like Silver.

Bitcoin derivatives, in my opinion, will not suffer a similar fate because price discovery is set by an actual supply and demand market place. As I noted in a previous article, if the intention of Wall St. is to disrupt bitcoin before it disrupts the Fed the ‘soft underbelly’ of vulnerability for bitcoin appears through attacking exchanges through patent law (claiming that the patent to make virtual markets belongs to Wall St.).

So what’s the upside of bitcoin derivatives?

I think the presence of institutional players will increase the capitalization of bitcoin and get us closer to $10 billion and beyond. (There’s no reason why BTC’s market cap can’t equal to Apple for example with a market cap of $400 billion)

Bitcoin supporters should welcome this development. -

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