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Date: 2019-12-25 23:11:15
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The upcoming Bitcoin reward halving is a much-anticipated and talked about events in the cryptocurrency space. The market is currently divided among those who believe it to be a bullish event for Bitcoin price because of the supply shock and those who see as a non-event.
Meltem Demirors of CoinShares, a digital asset management company, belongs in the second category.
According to her, “there is a very real possibility the price of bitcoin does not go up after halving.”
This is because, for the first time, there is a “robust derivatives” market for Bitcoin in the form of futures and market, she argues. As we already know, Bitcoin is still a speculative asset and according to Demirors, most of those firms will trade a derivative than the underlying asset itself.
She illustrates oil markets over the last 20 years where options and futures skyrocketed while oil production remained constant. In this speculation driven market, derivatives dominate trading and most firms trade paper contracts to speculate on the price of oil.
“There is a new market developing for bitcoin – one driven by speculative trading and enabled by derivatives.”
“The more bitcoin becomes an investable asset, the more it’s price becomes decoupled from its value and its supply and demand.”
At that point, it will become just another backwater in the big game of global speculation and become correlated to macro markets.
The Bitcoin derivatives market today is still small but it will grow quickly, Demirors said.
Wallet developer Jack Mallers, the founder of Zap Solutions and ZeroHouseEdge however, doesn’t agree with Demirros. Derivatives help in market efficiency and general price discovery but it does not affect the basic supply and demand of an asset, he countered.
“Derivatives derive their value from the underlying, settling against an index composed of spot exchanges. General arbitrage and market efficiencies will always keep derivatives tied to the underlying.”
The premium on the future, he said is only because of the cost of carrying and commodity derivatives were invented to simply transfer risk and has nothing to do with the price of an asset.
Price is a function of supply and demand and isn’t set by the producer of an asset. The willingness for someone to acquire an asset, Mallers said is what sets the price.
“Anything is only worth what someone else is willing to pay for it.”
And this is exactly the reason why he says the halving is not priced in.
“When a market goes through such a supply shock (one that no other asset has ever been through), it's impossible to predict where demand will meet the new-found supply.”
But time, as Mallers said, is always the ultimate truth-teller and we’ll have to see how in the coming years, Bitcoin will perform.