When Bitcoin started trading on the Chicago Mercantile Exchange (CME), there was a lot of enthusiasm because it showed that Bitcoin is establishing its position among the traditional investment assets. In fact, the decision to create Bitcoin futures contracts can attract more retail investors into the industry as there is a layer of the provision for the trading of Bitcoin. However, Bitcoin futures have been available for quite some time. Now that it is trading with a more reputable platform, it is getting a greater audience. With the CME being the world’s largest futures exchange, it is undeniable that people have more optimism about the future of Bitcoin.
The price of Bitcoin had grown phenomenally from $900 at the beginning of 2017 to nearly $19,000 at the end of 2017. It doesn’t seem like the craze around Bitcoin is going to die out any time soon. There are even some analysts who expect the price of Bitcoin will go up to $60,000 in 2018. Due to the limited supply of the industry, this can easily drive the price of Bitcoin up.
However, one must keep in mind that the value of Bitcoin is mainly driven by speculation. This is why there is an economy that believes the coin is currently in a bubble. Here is the reason why Bitcoin may very well be in a bubble.
- Release of the Bitcoin futures
Surprisingly, this is the financial instrument that has helped to solidify Bitcoin’s position in the first place. However, there may be some downsides to it being a Bitcoin future. For one, people are criticising and the fact that people are betting against ups and downs of Bitcoins without needing to purchase a Bitcoin. As futures contracts are classified as derivatives, investors can bet against the movement of Bitcoin the rule of the derivative.
If we were to look at it positively, investors could profit off the fluctuations of Bitcoin without having to store these cryptocurrencies themselves. Due to the huge security risk that comes with cryptocurrencies, this provides a unique method for people to profit off Bitcoin. However, this can mean the demand for the actual cryptocurrency can decrease which can drive the prices down. With the Bitcoin futures, the bubble that Bitcoin is in can pop very soon.
- Threat of regulations
A big reason why people are interested in Bitcoin is that it is highly unregulated and anonymous. This is a huge advantage especially for people who don’t want the government to know what they are doing with their money. However, it also creates an important flaw. Due to the anonymity of cryptocurrencies, governments will most likely regulate the space to tax the profit that investors get. In fact, the presence of cryptocurrencies can potentially affect how our financial market will function. Governments such as China have already banned the trading of cryptocurrencies domestically because they don’t want capital to flow outside of the country.
Besides the fear that capital will flow outside of the nation, there is a good reason for government regulation. In cryptocurrencies, it is entirely up to the investor to protect their investment. In other words, investors are not protected if their money goes missing. Therefore, investors are susceptible to a high level of fraud.
However, some may disagree. Some believe that the government should not even be monitoring cryptocurrencies because it is not classified as the security. Whatever the opinions may be, the government is keeping their eyes open to any progress done in the cryptocurrency market. As many institutions are sitting back and watching where the cryptocurrency is going next, we can expect government regulations take place in the near future.
- Scalability issues
Think about it. Have you ever seen any other currency that moves the way Bitcoin does? However, the main concern about Bitcoin lies in the scalability issues of its infrastructure. Platforms such as Bitcoin and Ethereum have the issue of not being able to scale to a commercial level. In fact, Bitcoin can only process a handful of transactions per second. If we compare this to established processors within the industry such as Visa, Bitcoin pales in comparison. Therefore, Bitcoin still has a lot of work to do with its infrastructure if it wants to be considered a serious contender as a payment processor.