Whether you are an investor that views cryptocurrencies such as Bitcoin as a currency or a means of investment (both views are widely held and accepted by many in the financial community), the out-of-this-world gains investors have experienced in recent months have resulted in a worthy amount of media coverage, much of which has covered the potential bubble related to Bitcoin prices we’re currently seeing.
One need only reference the stock charts of many high-profile tech bubble companies, such as Cisco Systems, Inc. (NASDAQ: CSCO), and pit such companies against the stock charts of most major cryptocurrencies to get the idea.
While I certainly share in the sentiment that Bitcoin is indeed in bubble territory, siding with a number of high-profile intellectuals on this topic, many of whom have already begun correlating the Bitcoin bubble to that of Tulip mania in 17th century Holland, I also agree that blockchain technology is not only here to stay, but set to revolutionize the world.
Expectations that 2018 will see dozens of new blockchain IPOs (initial public offerings) or ICOs (initial coin offerings) are likely to pan out, and investors picking the right horse may indeed become very wealthy very quick.
The near-term concern, however, shared by some in the cryptocurrency space is that the introduction of futures and options trading by the CME and CBOE over the next 10 days will provide the first real, tangible test for Bitcoin et al. in the strength of the cryptocurrency sector to withstand the “short end” of the trade.
Currently, no viable options are available for investors to take large negative positions on cryptocurrencies, though some trading platforms do allow for small amounts of margin trading for short periods. The introduction of futures and options in this space will undoubtedly change the game, with many expecting increased volatility to the downside to match the extreme upside volatility seen of late as a potential side effect of both sides of the trade now being offered.
Being able to take a short position or go long put options is widely considered to be one of the key facets of a well-functioning market; the ability for investors to make money on the upside as well as the downside is often touted as a key proponent of price discovery in a range of financial markets (bonds, equities, etc.).
Other long-term potential risks to cryptocurrencies that have not reared their heads of yet include government interference and taxation of cryptocurrencies, large-scale hacks, such as the widely covered Mt. Gox hack in 2014, and a potential rush to the exits spurred by an economic shock and the need for tangible fiat currency remain.
The next 10 days should prove to be very interesting for cryptocurrency enthusiasts. Bitcoin and its cryptocurrency compatriots may continue to rise at breakneck speed, and options may be a moot point in 10 days’ time. That said, given the balance of possibilities related to the introduction of options, if there were ever a time to be on the sidelines, now looks to be it (in my opinion).
Stay Foolish, my friends.
