Landing the Big Fish
When searching for opportunities in the markets, traders always day-dream about landing that one trade that just takes off and never looks back, landing them a massive, wind-fall profit. Well, one such trade which would have delivered this dream profit would have been to buy Bitcoin at the start of this year. As king of the cryptocurrencies, Bitcoin is attracting more and more attention and consequently continues to grow in value.
In fact, this year alone, Bitcoin is up over 600%! A simple trade, right? Wrong! You see, although it has seen gargantuan gains, it has also suffered terrible losses at times over the year; the type of losses that would be extremely difficult for the typical trader to stomach. The problem with Bitcoin is that, although it clearly surging in value, plumbing fresh record highs once again this month, it remains an extremely volatile instrument which like a bull at a rodeo, is constantly trying to shake its ride off.
The Bitcoin Rollercoaster
The chart above shows Bitcoin over the last 12 months. It is clear to see that if you had bought at the start of the period you would be up handsomely. Indeed, if you bought over the last month, you would be extremely happy with your returns also. However, note how many violent downswings there are. If, for example, you bought at the start of September when Bitcoin was trading $4,950, do you think you would still be holding two weeks later when Bitcoin was trading over $1500 lower at $3226? Indeed, even right back at the start of the year, if you bought Bitcoin on day one of 2017, within 10 days it was immediately down 20%.
Volatility Likely to Increase
As more and more investors load into the Bitcoin market space, from retail traders at home to major-league hedge funds, this type of volatility is likely to worsen. Similar price drops in almost every other market and instrument show us that when the market is crashing, it is exacerbated by a sharp increase in volume. Price is plummeting so more and more people start squaring their orders, sending price further lower, followed by further squaring of orders, until the market reaches equilibrium and price stabilises.
CME Group To Launch Bitcoin Futures Contract
As both Bitcoin’s price and volatility continue to increase, and the market volume grows, CME group is planning to launch a futures contract linked to Bitcoin which would create a more stable environment for institutional investors to trade Bitcoin. CME, which is the world’s largest futures exchange, has strict limits in place which temporarily suspend the trading of any instrument if price changes exceed a certain level. Although this type of event doesn’t happen regularly, and is clearly not good for investor confidence, it is far better than allowing the instrument to keep trading and fall victim to further losses.
The group’s new futures contract would have price limits which suspend trading of the contract if price fluctuations hit 7% to the upside or 13% to the downside. Importantly, this protects against trading outside of the 20% range and is similar to the limits placed on the major US stock indexes.