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If you are thinking about buying bitcoin, you should read our 5 reasons you should not buy bitcoin first.
Currently the cash market for bitcoin operates solely on bitcoin exchanges, places where you can buy or sell actual bitcoin. These firms are fairly unregulated, which means that there could be counter-party risk when you trade bitcoin in those markets. The definition of counter-party risk means is that you cannot trust that the firm that you are trading through will make good on your bitcoin trades.
Similarly, there have been cases where such bitcoin exchanges have been hacked, causing them it to lose all their customers’ funds in the process! Make sure you do your research before picking a bitcoin exchange.
The current market capitalization of bitcoin is around $318 billion, which is not very large for a currency. To put this in perspective, gold has a market capitalization of more than $7 trillion.
Moreover, there are statistical postings indicating that only about 1,000 people control over 40% of bitcoin, worldwide. This could lead to market manipulation by these individuals and increased volatility as they try to trade out of their bitcoin positions.
The Chicago Board of Options Exchange (CBOE) recently launched its offerings of contracts for bitcoin futures. After about a week of trade, we see no more than a mere 1,500 contracts bought and sold each day, which is not a lot. Moreover, the bid/ask spread on these contracts is close to $100, meaning you would have to give up $100 just to get in and out of a position. Too costly!
Compare this to the S&P futures which average a million contracts bought and sold each day with $12.50 in bid/ask spread to give up.
Just recently, the CBOE and Chicago Mercantile Exchange (CME) launched bitcoin futures. These are better than trading in the cash market because they avoid the counter-party risk. These futures exchanges guarantee that a trade will clear.
However, these futures contracts have very large notional values. With the current price of bitcoin close to $20,000, the notional value for its CME contract, which is the contract most brokerage firms will offer, is around $100,000.
Typically, futures contracts offer leverage, meaning you do not have the have the full amount of the notional value to trade the contract.
However, since bitcoin is very volatile, brokerage firms have been requiring anywhere between 100% and 150% of the notional value in margin. This means you would need to put up around $100k just to trade a bitcoin futures contract! It’s simply just too expensive for a retail trader to reasonably afford.
In comparison, the S&P futures contract has a notional value of around $125k but you only have to put up $5k in margin to trade it.
Bitcoin (3 charts below) has been going straight up in parabolic fashion! If we look back at other markets with similar growth patterns, they all eventually crashed sharply!
The silver bubble in 2011:
The NASDAQ Tech bubble in 2001:
The Bitcoin bubble:
This is not to say that we know where the price of bitcoin will actually be in the future. You can definitely argue that it can keep going higher. But, it is just something to consider before putting your capital at risk.
Lastly, you don’t want to be the one buying an asset when it is the most expensive it has ever been. That would be like paying $100 for a gallon of milk; i.e., a situation both unreasonable and unsustainable.
The way we trade at Option Posts, we use options to reduce risk and increase our probability of trading success. Currently, trading bitcoin in either futures or cash markets, there is no edge. Nobody truly knows what the value of bitcoin is or will be. It is all just a speculative guess and a wave of FOMO (fear of missing out).
Check out our blog where we discuss where we have an edge in the markets.
There is an equal probability of bitcoin going higher as of going lower in the near-future. Furthermore, there currently are no liquid options to trade on bitcoin, making it difficult for us to become involved in any aspect of bitcoin.
With that being said, if bitcoin options ever do come out, with due liquidity, we would have no problem trading them. If that were to occur, bitcoin options would simply just be another asset with sufficient volatility that we could take advantage of by selling options premiums.
There you have it! If you liked our 5 reasons why you should not buy bitcoin, be sure to leave a comment below!
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