Bitcoin to $100K: What will milestone mean for derivatives markets?

As a seasoned researcher with over two decades in the financial industry, I’ve seen my fair share of market trends and fads. The Bitcoin (BTC) phenomenon has undoubtedly caught my attention, not just for its meteoric rise but also due to its potential to disrupt traditional finance.

For quite some time now, the possibility of Bitcoin (BTC) reaching a $100,000 price point has been intriguing investors significantly. While individual investors frequently express excitement over hitting such symbolic thresholds, the real impact could stem from increased institutional investment and progress in Bitcoin’s derivatives market.

Currently, the total Bitcoin futures open interest stands at approximately 626,520 Bitcoins, equivalent to around $58 billion. This figure has grown by 15% over the past two months, indicating a rising trend in derivative trading. If Bitcoin were to reach $100,000, the open interest would amount to $62.5 billion, which would represent 3.1% of its projected $2 trillion market capitalization. On the other hand, the S&P 500 has an open interest of $817 billion in futures contracts, accounting for just 1.9% of its current $43 trillion market capitalization.

It’s not fair to directly compare Bitcoin with S&P 500 futures because more than 65% of Bitcoin trading takes place on specialized crypto exchanges like Binance, OKX, and Deribit. However, this proportion may decrease as exchange-traded funds (ETFs) that deal in spot Bitcoin start their own futures markets, particularly those that are attractive to institutional investors due to their in-kind creation feature.

While regulations can certainly pave the way, they don’t guarantee widespread acceptance. For instance, the CBOE introduced Bitcoin futures from December 2017 to March 2019, yet ultimately chose to halt the product due to insufficient demand. The latest approvals for spot Bitcoin ETFs are a step forward, but they also highlight the importance of closer ties with traditional financial markets.

Institutional adoption: The key to $100,000 and higher

The significant step of institutional adoption is crucial in transforming Bitcoin reaching $100,000 into substantial growth for derivative markets. For example, exchange-traded funds (ETFs) focusing on spots could pave the way for intricate strategies such as earning income through covered calls or managing liquidity risks. As institutions become increasingly confident in handling Bitcoin as a store of value, the derivatives market may adapt to cater to their advanced requirements.

Bitcoin to $100K: What will milestone mean for derivatives markets?

For novice traders, the intricacies of futures markets, especially short positions, can be bewildering. Contrary to popular belief, not every short position is a bearish indication. Strategies such as cash-and-carry, where investors secure a risk-free profit by selling futures and simultaneously holding the spot Bitcoin, lead to an increased number of short contracts. These strategies function to stabilize the market rather than speculating on price decreases.

A potential game-changing catalyst for Bitcoin’s price surge could come from a shift in corporate governance. Microsoft shareholders recently voted to allocate funds toward Bitcoin, signaling a significant display of intention by influential investors. Even if the plans are not approved in 2025 or are disregarded by the board, the mere act of voting on Bitcoin allocation creates momentum that could pressure other companies to follow suit.

Furthermore, Senator Cynthia Lummis’ idea of swapping US Treasury gold certificates for Bitcoin and establishing a “Strategic Bitcoin Reserve” could provide another factor boosting its price. Her bill suggests purchasing 1 million BTC, representing 5% of the total supply, which would be held for 20 years, underscoring Bitcoin’s potential as a valuable reserve asset.

Bitcoin derivatives markets are a consequence, not a cause

Although Bitcoin’s approach towards $100,000 sparks a lot of excitement, it’s more likely that broader adoption will influence derivatives markets rather than the other way around. The increasing concern among retail and corporate investors about the devaluation of fiat currencies serves as the main force propelling Bitcoin upwards. This psychological transition is what will eventually establish Bitcoin as a valuable component in institutional investment portfolios, not futures products or spot ETFs.

As a researcher, I have found that Lyn Alden’s work supports this narrative by demonstrating a connection between the worldwide M2 money supply and the price of Bitcoin. In times when governments speed up monetary stimulus or decrease interest rates, it seems that more investors turn to scarce assets such as Bitcoin as a means of protection against depreciation.

Consequently, a dynamic and fully-formed derivatives market will develop following, rather than preceding, the significant increases in Bitcoin’s value.

This piece serves primarily for informational purposes, not as a substitute for professional legal or financial guidance. The ideas, perspectives, and opinions presented here belong solely to the author and may not align with those held by CryptoMoon.

2024-11-19 23:57

Institutional adoption: The key to $100,000 and higher

Bitcoin derivatives markets are a consequence, not a cause

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