As Ethereum surpasses its all-time-high, and an 8-fold increase over the last year, many will wonder if, and how, the price of the number 2 cryptocurrency will be affected when CME futures opens for trading Ethereum this coming Sunday, pending final approval.
It can be wondered if a similar scenario will play out, as that of Bitcoin’s debut on the CME back in December of 2017. Was it mere coincidence that the Bitcoin price reached its peak at the same time, and then proceeded to have a quite remarkable crash thereafter?
According to a report published in the Federal Reserve Bank of San Francisco, it did not appear to be a coincidence:
“The rapid run-up and subsequent fall in the price after the introduction of futures does not appear to be a coincidence. Rather, it is consistent with trading behavior that typically accompanies the introduction of futures markets for an asset.”
The report goes on to argue that a very similar thing had been seen in the US housing market boom and subsequent collapse in 2000, after the creation of instruments allowing investors to bet against the housing market.
“Similarly, the advent of blockchain introduced a new financial instrument, bitcoin, which optimistic investors bid up, until the launch of bitcoin futures allowed pessimists to enter the market, which contributed to the reversal of the bitcoin price dynamics.”
The report concluded with a rather gloomy view on how futures can affect an asset:
“Once derivatives markets become sufficiently deep, short-selling pressure from pessimists leads to a sharp decline in value.”
However, it did also conclude more positively that:
“as speculative dynamics disappear from the bitcoin market, the transactional benefits are likely to be the factor that will drive valuation.”
Currently, Ethereum is riding high and continues to outstrip Bitcoin in its percentage rise over the last year. With Ethereum 2.0 aiming to drastically reduce fees and increase scalability, and with the huge popularity of DeFi riding on the back of the Ethereum blockchain, the number 2 cryptocurrency continues to make traction.
An opposing view on the futures effect was proffered by Vijay Ayyar, head of Asia Pacific with crypto exchange Luno in Singapore:
“For all you know, major players may be looking to get long exposure through futures, now that there is an institutional-grade product to do so,” he said. “Smart traders moved to Ether when Bitcoin topped out around $40,000 and have made more money.”
For now, Ethereum could either be seen as still in its infancy, and an asset class that is slowly maturing, or it could be a bubble that is about to pop as more investors see an opportunity to short – only time will tell.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.