The ‘Jeremy Corbyn’ asset of the financial markets
“We are now the political mainstream.”
Labour leader Jeremy Corbyn, buoyed by a better than expected election result in June, confidently spoke those words at the recent Labour Party Conference.
I have to admit that Corbyn’s journey from the anonymity of Labour’s backbenches to the party leadership and to a candidate for the PM job has been remarkable.
In the financial markets there’s an asset that’s had a journey not dissimilar to Corbyn’s.
It’s come seemingly out of nowhere. Not many people had heard about its existence five years ago.
It’s seen an unexpected surge in popularity (like Corbyn’s landslide victory in the Labour leadership race).
A strong pullback (Labour has polled at historically low levels).
And an unexpected rally leading to it being more popular than ever (just like Corbyn if today’s polls are accurate).
Have you guessed it yet?
Yes, of course I’m talking about bitcoin. It’s the ‘Jeremy Corbyn’ asset of the financial markets.
Corbyn has made a remarkable journey from the fringes to the mainstream. Bitcoin is about to pull off something similar.
From the margins to the centre
There are people convinced Corbyn will be the next PM, people who assume it could happen, and sceptics who think he’ll never get anywhere near winning an election.
The same goes for bitcoin with bulls shouting it’ll be worth millions one day, people who see its rally continue for a while, and people who expect it to crash and burn any second.
Corbyn has proclaimed his policies, which some consider ‘hard left’, are now mainstream. And if the polls aren’t lying about him being ahead of Theresa May, who can blame him?
Interestingly, a similar thing is now being said about bitcoin.
“Bitcoin is moving from the margins of the financial world closer to its centre,” writes Alexander Osipovich in the Wall Street Journal.
What prompts him to say that?
Well, it’s because bitcoin will soon be traded on the futures market.
Futures are a way for traders to protect themselves against future price fluctuations. The buyer and seller agree a fixed price to trade a commodity like gold or oil at a future date.
That way the buyer is protected against the price shooting up and the seller is hedged against it plummeting all of a sudden.
The fact that the world’s biggest exchange group, CME Group, is going to allow bitcoin futures is a massive vote of confidence for the cryptocurrency.
The move makes bitcoin more mainstream.
It means investors will be able to invest in bitcoin through popular retail brokerages. Right now they still have to buy it at bitcoin exchanges which are less familiar channels to most investors.
Bitcoin was already on a path towards general acceptance.
There are now hedge funds dealing exclusively in cryptocurrencies. And investment bank Goldman Sachs is exploring avenues to launch a trading operation for cryptocurrencies.
In this sense, bitcoin futures are just the next thing to help cement its place in the financial markets.
In fact, people can already see the next step: crypto exchange-traded funds (ETFs).
It works the same for oil as the United States Oil Fund also deals in oil futures rather than the commodity directly. An important reason why bitcoin ETFs weren’t approved before is because of the lack of bitcoin derivatives.
With the introduction of bitcoin futures by the end of this year, it looks like it’s only a matter of time before we see bitcoin ETFs on the markets.
This will provide a further boost to cryptocurrency trading.
“ETFs and derivatives are likely to make bitcoin trading a lot more palatable for hedge funds and mutual funds, as the instruments will allow them to hedge for the digital asset’s volatility and avoid some of the hassles of investing in bitcoin directly,” writes Camila Russo on Bloomberg.
Bitcoin futures will give a lot of players in the financial markets easier access to the cryptocurrency.
How will this impact the price?
“It will open the floodgates”
Bitcoin is gaining momentum, no doubt about it.
Rather than slowing down its value seems to be going up faster and faster.
Less than two weeks ago the price of a single bitcoin reached $6,000 for the first time. Today it’s already worth more than $7,000 per unit.
Part of the recent price surge is no doubt due to the news about bitcoin futures.
It’s yet another sign that market attitudes are changing. Bitcoin is increasingly seen as a legitimate financial asset.
If bitcoin’s market value is already going straight up, what can we expect to happen when bitcoin futures are launched?
That’s hard to say.
Although CME’s plan to introduce bitcoin futures is definitely a stamp of approval for the cryptocurrency, new futures contracts aren’t always a success.
But assuming there is enough demand for these contracts, it could see many more institutional investors getting in on the cryptocurrency action.
“The move could open the floodgates of investors who have been standing on the sidelines as bitcoin soared over 500 per cent this year,” says Russo.
Bitcoin trading on the futures market could persuade people on the fence to get involved in the crypto market.
It might convince people who feared they’d missed the boat that it’s not too late to invest in bitcoin. It opens up the market to those who are convinced it’ll fail. And it’ll give investors easy access to cryptos through their brokers.
There’s also the argument that bitcoin futures will help reduce volatility – one of the biggest criticisms of cryptocurrencies.
“Introducing bitcoin futures could help smooth out some of bitcoin’s wild price swings, traders say, because it would give bitcoin pessimists more opportunity to express their views in the marketplace,” notes Osipovich.
It’s supposed to bring more balance to the market as it used to be difficult to bet against cryptocurrencies. Now that the market can comprise both crypto bulls and crypto bears, it should decrease volatility.
There’s no telling how long cryptocurrencies will remain popular and if they will ever truly become mainstream.
Like Jeremy Corbyn, whose rise is in part due to the unpopularity of the Conservative government, cryptocurrencies are capitalising on other asset classes falling out of favour.
How long they can keep this up is still anyone’s guess.