One of the things you have to accept as an investor is that you're going to be wrong from time to time. But the important thing is that you learn something from your mistakes and you apply what you've learned to future investing endeavors.
Yeah, I was dead wrong about bitcoin
Less than two weeks ago, I proudly proclaimed, like any talking head you'd see on a financial news network, that bitcoin "could plunge on Dec. 11." Why Dec. 11? My thesis was pretty simple.
Up until the beginning of futures trading on bitcoin, there didn't exist what I'd called a "fair" market. Bitcoin could be purchased and sold on decentralized exchanges, but there was no way to make money if it dropped via short-selling or futures contracts. The introduction of futures contracts was a means to finally allow skeptics an opportunity to make money, as well as lure in big money from institutions that had mostly been waiting on the sidelines.
On Sunday, Dec. 10, CBOE Global Markets (CBOE 1.71%) became the first platform to begin trading bitcoin futures. I expected volume to be relatively light, considering that trading was kicking off on a Sunday, and believed that when Wall Street investment firms got back into their offices on Monday, Dec. 11, bitcoin's magical run could come to an end. With CME Group (CME -0.72%) also set to offer futures trading beginning on Dec. 17, I figured there was more than enough skepticism to drive emotional investors out of bitcoin and to the sidelines.
But something happened -- bitcoin's run didn't come to an end. In fact, bitcoin has pushed to fresh all-time highs and recently came within a stone's throw of $20,000 per coin, up from $967 per coin at the beginning of the year. I was very, very wrong.
Here's why futures trading didn't crush bitcoin
What went wrong with my thesis of a bitcoin plunge once futures trading began? I assumed that institutional investors who've kept to the sidelines this entire time would be immediately enticed by the opportunity to bet against bitcoin. However, futures contract volume through Dec. 18 tells a very different tale.
As noted by Bloomberg, futures contract trading in terms of dollar value totaled $61 million on the CME Group's platform in the first eight hours post-launch, compared to $49 million in total value for the CBOE platform during the first eight hours a week earlier. Nevertheless, the average daily total value in bitcoin contracts since futures trading kicked off has been around $75 million. By comparison, gold futures and oil futures see a respective average of $63 billion and $145 billion in total value change hands on a daily basis. What this tells me is that institutional investors are mostly still sticking to the sidelines, and that emotional retail investors are very much in charge.
Why are institutions sticking to the sidelines when they have a clear path to bet against bitcoin? If anyone knew that answer, we wouldn't have nearly the same volatility on bitcoin. My best guess is that institutions can't control the emotions of retail investors who've largely been responsible for driving bitcoin to new highs. Just as you're reminded how dangerous it can be to try to "catch a falling knife," it can be just as dangerous in the short-term to stand in front of a speeding locomotive.
There are also a number of "what ifs" regarding bitcoin that could send the cryptocurrency screaming in either direction. For example, there's the regulation of bitcoin, which remains uncertain in the United States. Will the federal government allow this asset to become legal tender, or could it choose to crack down on the cryptocurrency like South Korea and China have? Without that answer, risking money in the futures market might not be prudent for institutional investors.
Make no mistake about it: Bitcoin is still in a bubble
However, being wrong about when bitcoin would plunge hasn't changed my perception that, at some point in the future, it's going to deflate.
Perhaps the biggest issue I have with bitcoin is its focus. Whereas most virtual currencies are going all-out to focus on their blockchain development, bitcoin seems content becoming a medium of payment facilitation. While there is value in being the go-to virtual currency for merchants, there's a much greater value to be had as being the desired blockchain of enterprise customers.
To add to that, there's still a lot of confusion among the public over what bitcoin is and what it can be used for. A LendEDU survey from a few months ago found that nearly six out of 10 respondents weren't even aware that bitcoin was legal in the United States. This lack of understanding serves as a warning to investors that pure emotion appears to be driving bitcoin's price higher, rather than anything truly tangible.
And if that's still not enough, we've seen numerous examples in recent decades of new technologies failing to be adopted by businesses as quickly as investors had hoped. From 3D printing and human genome decoding to internet business-to-business commerce, bubbles were created and popped by failing to meet expectations. The introduction of virtual tokens and blockchain technology may very well meet that same fate.
My suggestion: Stick to the sidelines.