Email

Bitcoin Traders Can’t See the Perfect Gold Play They’re Creating

8 | By Shah Gilani

Fasten your seatbelts, bitcoin futures are about to take off.

Eventually, that’s going to impact gold… But not in the way you think.

While there’s currently no meaningful correlation between the price of bitcoin and gold prices, the advent of futures trading in bitcoin could change that, dramatically.

That’s not because traders or investors will start looking at bitcoin as an alternative to gold. It’s because eventually gold will be a hedge against bitcoin collapsing, precisely because it isn’t an alternative to gold.

And that sets us up for an opportunity that bitcoin traders can’t even see coming.

Here’s how bitcoin futures trading will impact gold, and how to trade both…

Bitcoin Will Hit its First Tripwire Next Week

Bitcoin futures start trading at 5:00 p.m. EST this Sunday, December 10 on the Chicago Board Options Exchange under the symbol XBT.

Why Sunday at 5 p.m.? Because that’s when the new trading week begins in Asia. But that doesn’t mean traders in Japan, China, Australia, and the Asia-Pacific region will be the first to jump in or on bitcoin futures. Thousands of U.S. and European traders will be watching their screens and joining in.

That’s if there isn’t a crash.

By crash, I mean a crash in the price of bitcoin itself or at the Gemini Exchange where bitcoins are stored and traded in the “spot” market for cash.

The Gemini Exchange, the first U.S. exchange licensed for bitcoin trading and regulated as a trust company by the New York State Department of Financial Services, was started and is principally owned by the Winklevoss twins (hence the name).

Gemini is where the Cboe will get cash bitcoin prices, against which it will price and settle its futures contracts.

Wild swings in bitcoin pricing – accompanied by their meteoric rise from $1000 at the beginning of the year to over $19,000 at one point yesterday – guarantees interest in futures trading.

Some traders will want to speculate on gains by buying futures, and some will want to short futures to hedge a price collapse. Either way, futures prices could swing wildly, triggering trading halts at the Cboe. If they move 10% or more from where they closed the night before, the futures will stop trading for two minutes. If they trade at 20%, above or below, where closed, trading will be halted for five minutes.

Forget five minutes, two minutes can be an eternity if you’re short or holding futures contracts and can’t trade out of positions as the cash market keeps trading and moving the actual price of bitcoin.

And that’s just the tip of the iceberg.

The cash pricing of bitcoin, based on the prices it trades at on the Gemini Exchange which Cboe futures prices are based on, can go crazy in either direction. Worse, trading there can stop altogether.

It’s already happened, and is likely to happen a lot more. Besides not being technically or mechanically ready for a potential explosion in trading volume at Gemini, the Exchange has been hit with “denial of service” outages. While some of those outages resulted from volume spikes and internal plumbing issues, there may have been denial of service outages from hacks.

If you think anything’s going to be better when the Chicago Mercantile Exchange begins trading its own bitcoin futures on December 17 under symbol BTC, you’re mistaken.

The CME will have its own trading halts when their futures contracts trade at 7%, 13%, or 20% below previous closing prices. And the CME is pricing its futures against a “reference rate” it cobbled together by blending cash prices from bitcoin trading on BitStamp, GDAX, itBit, and Kraken, all of which have had trading issues.

Good luck to you futures traders and cash traders.

Prepare Now for the Gold Opportunity of a Lifetime

As far as me trading bitcoin, I haven’t traded any. And as far as the futures, I’m not going to right away. It’s too dangerous for my taste. But I will, eventually.

Here’s how I’ll play the game…

If the futures market is trustworthy, I’ll play there. I won’t buy bitcoin, ever, because I don’t trust it. If I buy bitcoin and the price collapses, I may never be able to sell them at any reasonable price, or at all.

Just saying.

However, I’ll put up 30% margin at the Cboe, or 35% margin at the CME and trade the futures, even though I know there’s no guarantee I’ll be safe playing there. There I might be able to get out using stop-orders, or get out after halts, or maybe not get out and just watch my trades make me a fortune.

Based on how high bitcoin has moved, I’d be tempted to buy futures. But based on the potential for disaster in terms of trading halts and price discrepancies in the cash market, I’d be tempted to short futures and bet on a price collapse.

I’d rather play bitcoin both ways, and I can do that by buying straddles in the bitcoin options market. I’ll tell you how to do that next week.

So, what’s bitcoin got to do with gold?

Nothing much to start off with. There’s no correlation.

However, one’s going to develop.

What’s going to happen if bitcoin keeps rising and creating positive futures trading, allowing traders and investors to be more prudent in their position-taking, gold will probably drift lower. Gold might test $1100 or $1000.

Calm trading in a rising bitcoin would elicit more commentary about how bitcoin is a store of value, and how it’s more profitable to hold than gold. If there are any global crises ahead, bitcoin will be where investors flee to.

That’s the kind of chatter that surrounds bitcoin already, and one reason gold’s been drifting lower.

I’m a contrarian when it comes to bitcoin; I don’t believe any of the hype about bitcoin, other than that it’s based on blockchain which I like as a technology, and it’s a speculative trading instrument (not an asset class).

If you’re like me, and you see gold falling against a rising bitcoin, there’s a smart trade waiting for you.

I’m watching gold and gold mining stocks. If bitcoin keeps rising and gold keeps dropping, I’ll be looking to buy gold and gold miners as they drift lower.

Why? Because when the bitcoin dam breaks (and it will), gold will be so cheap and gold miners so oversold. The flight to quality, into the real store of value, into the age-old alternative currency, into a real asset class, into gold, will be spectacular.

Keep those seatbacks in their upright position and your tray tables stowed.

The bitcoin futures launch may have a hard landing, and gold, sitting on the opposite runway, is waiting for clearance.

Sincerely,

Shah

8 Responses to Bitcoin Traders Can’t See the Perfect Gold Play They’re Creating

  1. Jerry Szarnych says:

    Fascinating insight into this hot topic and interesting alternative strategy to benefit either way Bitcoin trading goes on the new markets.
    Thanks for the continued sharing of your vast range of insight and knowledge and expertise.
    Jerry

  2. john says:

    such comedy and lack of understanding. financialization defeats the purpose of bitcoin. trust, proof of work, cutting out the middleman. all you wall st. rent seekers-what makes you think you can get your cut? central bank prints free money but still charges fees/royalties. guess its contagious. you think you can do the same. you got it backwards. you are going to crash yourself/futures market, not bitcoin

  3. Alberto Esposito says:

    It’s now sometime later and both bitcoin and gold have dropped in value. Gold sells at 1253.40 , and bitcoin sells at 6076.50 American dollars. Not sure if there’s absolutely any reason they should go up together as one does not concur with the other there is no divergence in time or scope . Just a new mechanism for transfer, among a host of new test cases for block chain as a technology
    June 28/2018

    • Kari says:

      The U.S. Dollar usually has an inverse correlation with the price of gold since gold is priced in U.S. dollars. As of recent, at least the strength of the dollar has been a downward pressure on gold and there may be multiple other variables.

      There’s a trade for gold but if we, as retail investors, ever come close enough to needing physical gold in order to buy things, we have bigger things to worry about. I’d own guns and ammo before physical gold. Gold is a trade IMO.

      I don’t have a strong conviction on bitcoin either way.

Leave a Reply

Your email address will not be published. Required fields are marked *