Depending on who you ask, Bitcoin is either digital gold or a mirage. Massive wealth is being created but many people are increasingly comparing it to the Dutch tulip bubble of 1642 while saying that cryptocurrencies lack basic fundamentals or a standardized valuation model.
Instead of rehashing arguments about how bankers let down millions during the Great Recession and that having a decentralized currency is the future, or even discussing the many differences between fiat and cryptocurrencies; we’ll get right to the point – most of these critics are looking at cryptos through the wrong lens. Futures provide a standardized method of at least seeing where the consensus expects Bitcoin pricing to be down the road.
Unlike other asset classes, bitcoin’s value is currently determined almost entirely by demand. Recently launched futures contracts may have some impact on pricing, but demand should remain the dominant factor driving valuations; especially with a mining cap set to happen somewhere around 2024.
It is reasonable to expect that demand will continue to increase because demand for most assets (even tulips) rises when plotted on a long enough time horizon. Like with real estate in San Francisco or Manhattan, this long-term demand set against a finite supply should cause prices to rise over the long-term, even when accounting for short-term volatility.
Though futures contracts can result in rampant speculation, such as with tulips in Holland, that is unlikely to happen here because Bitcoin has value as both an investment vehicle and a transactional currency. And as people are increasingly able to use it to pay for lunch or dinner, their ride to the restaurant or even to keep a roof over their head, underlying demand will surge even as institutions increasingly horde crypto stockpiles.
Bitcoin’s market cap recently passed $300 billion. Sure, that’s a fraction of other asset classes. But it does represent a startling rate of growth for both speculators and spenders from even one year ago, and some estimates have valuations soaring many multiples higher. This may feel excessive, and compared to other assets it is, but expected demand hasn’t even yet come close to peaking.
This makes investing in cryptos an unpredictable game that only people with a stomach for risk should play. But that will not always be the case.
Futures contracts have already reduced a good deal of that uncertainty by enabling investors to hedge against the downside, which should help reduce overall volatility and establish more normalized pops and drops. They have also somewhat slowed the rate of growth even as demand has continued to surge. But they also provide an additional benefit.
By viewing Bitcoin futures positioning similar to how many experts look at this data for other assets including equities and other asset classes, analysts and investors can make a reasonable estimate for where to expect Bitcoin valuations to be down the road. The wisdom of the crowd, so to speak. This will lead to a trustworthy, stable valuation curve that can eventually be extrapolated out even further based on recognizable patterns.
Yes, Bitcoin is not as mature as other assets. Sure, market caps are a fraction of more traditional investments. But just because people are excited about the future does not mean we are hoarding tulips before the fall.
Perhaps demand just hasn’t yet normalized. Once it does, a healthy and active futures market will enable accurate valuation modeling that skeptics are clamoring for and institutional investors crave.
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