CME Futures: Does Wall Street have any clue what they are doing?

[traderash@aol.com]

I am very confused by the CME's listing Bitcoin, especially to be cash settled at the end of the day. I have several questions, perhaps somebody can help me? First, in any futures contract, somebody has to take the opposite side of the deal. So, who is going to take the short position?

I can't imagine anybody with a brain deciding to take the short position? I mean seriously, the float on Bitcoin is much, much lower than everybody on Wall Street thinks it is. It is probably even lower than the Bitcoin Community thinks. With a market cap of approximately $100 Billion, couldn't any average Billionaire or Bank just purchase long contracts and then if the market doesn't go their way right away, all they would have to do is set up accounts at all the major exchanges and just start buying everything across the board.

They could easily buy $5-10 Billion in Bitcoin and it would go lock limit up for months and months? And that number is way over kill. I would imagine with $100M- $1 Billion, systematically placed, people would see the price go up and BTC owners would spot it right away and not sell their coins for any reasonable price?

The could also flood just a few exchanges and suck up all the supply and then do nothing on the other exchanges and just wait for huge arbitrage opportunities.

In other words, I just don't see how anybody would take the other side of those long contracts. In order for somebody to take a huge short position, they would have to have an enormous amount of BTC already in their control and then when the big dawgs do a short squeeze, they would have to defend their position by dumping mass amounts of BTC on the open market to hold prices down. However, I just don't think that anybody/entity has enough BTC to adequately defend their position and they will quickly get stopped out and lose everything.

Is there something I am missing? This seems like a complete no-brainer as far as I can see. It is not going to be easy to manipulate the BTC market to artificially hold down the price, like in silver and gold. JP Morgan can easily naked short to infinity and so far there hasn't been any players big enough, or with high enough risk tolerance to squeeze the naked shorts. The only thing that keeps those markets functioning at all is because the risk of somebody with big enough balls that may just take a long position and demand delivery, which almost certainly would not be possible.

Now with the Bitcoin market, we know for certain that the risk of forced delivery is off the table, as it is a cash settled market.

So in my view, it would be complete suicide to take a short position because any medium size player could team up with couple of people and purchase 70-90 percent of the float and watch the prices skyrocket.

I know these big banks and hedge fund traders are much brighter than I am, so I can't believe that I figured this out before they did, so if they are aware of this, how are they going to make a profit? What is their model?

I suspect that this could be the shortest contract the CME has ever had. Unless somebody can explain to me where my logic is faulty, the CME will discontinue trading this contract within 60 days as there really won't be a market if you don't have sellers?

What do you guys think?

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[Realist247]

You've got to be kidding me.  You honestly don't believe that there won't be short sellers?  Myself and many others I know have been waiting a long time for the opportunity to short this market.

And what I just said is just individuals.  Wait until the banks jump in and do to BTC what they've been doing to gold for decades to artificially suppress the price.  When people say that BTC is the "new gold" I don't think that 99.9% of them have any idea how accurate they are...especially in the eyes of central banks.

The scenario that you've stated is what I'm personally counting on to happen.  Short sellers hope all of the dumb money floods in and the market gets ridiculously overbought.  That's when the shorts come in and really bring the pain to those that don't understand that what goes up must come down....especially the first time they try to drive the price to the moon.

[traderash@aol.com]

The problem with your theory is that Bitcoin is a very limited supply. You can't cover short positions if nobody is willing to sell. It isn't like gold or silver, where we don't really know exactly how much is out there. With Bitcoin, we know how much is out there and if you enter into a contract to provide me with 25 million Bitcoins you are in very big trouble when it comes time to settle the account. You will be in breach and you will be forced to make good on the contract, which would be impossible to fill. Your liability is infinite.

You and a lot of other unsuspecting people are going to lose everything. Not just your initial investment like on the numerous Bitcoin futures trading sites. There, you invest $10k and short the market and it goes to infinity, you get stopped out and just lose your investment.

In the real world, where the big dawgs play, they don't let you out of the market. When you get a margin call on your $10k investment that says you need to bring in another $5k buy the close of the business day tomorrow, you either bring it in, or they liquidate your account. If it is lock limit up and they can't liquidate your account, they come after you house, your car, all your assets, even your clothing, you will lose everything.

There is nothing wrong with shorting Bitcoin, most of my trading is shorting Bitcoin. However, it is on exchanges where I know I am limited to losing only my original investment. And usually the only reason I short Bitcoin is because after a huge run up, I don't want to sell, but I always want to keep my gains. With the leverage I get, I only have to invest a small amount to protect my gains. If I am wrong and the market goes against my short position, no problem because my Bitcoins are going up in value and I lose my short position.

If you don't understand these concepts, you might want to hold off before jumping in there with Billion dollar hedge funds, because they will clean your clock like you have never before imagined.