Bitcoin hits US$16k. Up from $15k yesterday. Check back tomorrow for new digits.
Traditional valuation methods completely fail with Bitcoin, so the price is governed by sentiment. It has awesome momentum. Fear of missing out (FOMO) is rife.
A futures exchange in New York will start to trade Bitcoin starting Monday. For the first time, people will be able to bet on Bitcoin, both up and down (long and short), using US dollars. That is, you can bet on the price of Bitcoin to go up, or to go down, without ever having to own any.
This is important because the introduction of futures markets has previously coincided with the end of upward movement in several commodities, such as uranium in 2007. Many say that futures markets are used to control the price of gold, which is politically sensitive and widely regarded as a barometer of health for government currencies. The way it works is that the futures contracts are effectively an artificial supply of the underlying commodity, thereby changing the supply and demand balance. There is far more “paper gold” (contracts entitling a holder to gold) than real gold in the financial world.
Futures markets also allow a determined and well heeled player to push the price around by simply buying long or short sufficient to move the market. Thus, any price with a futures contract on it can be pushed around if one is prepared to burn some cash. Central banks have infinite cash (they can always make more), and are very sensitive about competing financial products. If done judiciously, taking advantage of people’s stops and psychology, one can even make a profit by pushing the market around — it needn’t cost much at all.
Now suppose you were part of a bunch of profit-seeking money men looking to make a serious killing. Perhaps you are at an influential global player like Goldman-Sachs. Along comes Bitcoin, a few years ago. Would the following scheme appeal?
- Buy bitcoin and plant favorable stories in the media to move the price up.
- As the price moves up, momentum sucks in hordes of investors.
- Open an exchange for futures contracts on Bitcoin.
- Take out a large short position on Bitcoin, by buying short contracts at the futures exchange (the kind that increase in value when the price of Bitcoin goes down). Should be easy to find people to take the other side of the contracts, because nearly all of the public are going long, expecting the price to go up.
- When set, sell all your bitcoins and buy more short contracts aggressively and quickly, in order to smash the price down on the futures exchange. Simultaneously, use your influence with governments around the world to “protect their currencies” by issuing regulations that make it difficult or illegal to use Bitcoin.
- The public, seeing the price of Bitcoin now going down and staying down, urgently want to sell. The price is routed.
- Cash in your futures contacts. The short positions you held will have gone up enormously (a hundred fold? a thousand?) in value as the Bitcoin price collapsed.
- Contemplate how the whole price movement, first up then down, simply transferred cash in government currencies from some people to others, while nothing useful was made or created.