The Big Short, Again?


Just in time to burst a bubble, there comes this Sunday bitcoin futures come the Chicago Board of Trade (CBOE) and more later from the CME. Now there is way to bet against the tremendous rise in bitcoin. It’s almost similar to the housing bubble a decade ago when credit default swaps were applied to mortgage backed securities to short the real estate market. But in this Big Short, who will be on either side of the trade?

Unlike the stock exchange, in the futures market there is only one winner.  For every short position, there needs to be a long one since futures are a zero sum game. In effect, the short trader is betting prices will go down while the long trader hopes prices will go up. In order for a futures market to survive, there needs to be enough shorts and longs; or said another way, there needs to be enough hedgers and speculators.

Who would do the bitcoin short trade? Companies, firms, and individuals who are holding lots of bitcoin and who may not like the price of bitcoin going down. For them, the short trade is a side bet: if bitcoin goes down in value, the losses are offset by gains from the futures contract. Given the volatility of bitcoin, anyone doing business in bitcoin can not necessarily afford loses after receiving payment in bitcoin.

Online retailer, Overstock, who receives bitcoin and other cryptocurrencies as payment could be a short seller, a hedger. Overstock may use futures to lock in the value of their bitcoin holdings. Circle Financial may be another hedger given the volume of cryptocurrency transactions used its cross-border payment business. Circle no longer deals directly in bitcoin, after pivoting to doing payments. Its product is free and Circle makes money by trading bitcoin and other cryptocurrencies.

While it’s hard to predict the success of bitcoin futures, it’s helpful to remember that the CME lists futures contracts on real estate, based upon the Case/Shiller Home Prices Index. Despite being listed since 2006, the real estate futures never took off due to a lack of hedgers, speculators, and market liquidity.

Other than hedge funds and some business, who is willing to bet against the rapid rise of bitcoin?