Getting Ready For a Bitcoin Crash ?

Bitcoin as of Dec 5 2017

Bitcoin futures beginning trading December 10 on the CBOE (Chicago Board Option Exchange)

From CNBC:

Bitcoin futures will allow institutional investors to buy into the digital currency trend, and likely pave the way for a bitcoin exchange-traded fund in the U.S., analysts say. The digital currency is prone to sharp gains and losses of several hundred dollars in only a few hours, and enthusiasts say bitcoin futures will help investors feel more comfortable with buying bitcoin since they can use futures to protect against major losses.

"The prospective introduction of bitcoin futures has the potential to elevate cryptocurrencies to an emerging asset class," Nikolaos Panigirtzoglou, a global markets strategist at JPMorgan, said in a Friday report.

Bitcoin has surged more than 1,000 percent this year to above $11,000, helped by increased interest from institutional investors. Twenty-four hour trading volume in bitcoin was $6.6 billion, according to CoinMarketCap.

This will be the first time there is a central place for "investors" to purchase and sell bitcoin . Actually the futures contract will "cash settle" based on the settlement price set by the exchange. This makes trading in bitcoin accessible to institutional investors and others that can only trade on a regulated exchange. It will make the pricing of Bitcoin transparent..all transactions on and off the exchange will look to the futures contract as the definitive exchange rate.

The futures contract means it will be the first time for "bitcoin skeptics" who see a bubble to go short the contract. It also opens up trading to futures market participants who already have sophisticated systems to access market information and execute trades.

My guess is that some of these sophisticated participants will trade the futures from both the long and short side taking advantage of the large price swings in the current market.

 Initially I would not at all be surprised that all the skeptics who have looked at the massive increase in value and said "I wish there were a way to short bitcoin" to take advantage of this opportunity, go short and push the price sharply lower with all the self reinforcing price movements we see so many times when an asset price falls precipitously.

It may well be "watch out below" as the futures contracts make their debut 

In an article on Bitcoin Jason Zweig in an article entitled Bitcoin Ignorance and You observed that in the case of those that have made money "investing in Bitcoin they may be falling into a behavioral pitfall (my bold)l:

David Dunning, a psychologist at the University of Michigan, ..is the co-author of research on what has become known as the Dunning-Kruger effect: the state of being ignorant of your own ignorance.

That seems to be a fundamental part of what it means to be human. “We don’t have an index or catalog in our heads that says, ‘You know this, you don’t know that,’” says Prof. Dunning. “So we’re left to guess.”...

 investors can fall into what Prof. Dunning calls “the beginner’s bubble.” New to the task, “they over-read the significance of the first few successes they have,” he says. “They base their ideas of their competence on much too little experience.” Not recognizing that they shouldn’t draw sweeping conclusions from only a handful of outcomes, “they think they got it right immediately.”

A quick hot streak can give beginning investors a jolt of confidence unwarranted by the evidence.

The bitcoin futures and the entry of experienced investors/traders into the market may give those confident beginners a rude awakening.

More on the prospect of bitcoin shorting from Bloomberg

Hedge Funds Prepare to Trade Against Bitcoin

A bitcoin big short is building.

The planned introduction of bitcoin futures contracts at CME Group Inc., Cboe Global Markets Inc. and Nasdaq Inc. will make it much easier to bet on a decline. Hedge funds, which have largely stayed on the sidelines, are waiting for the Chicago Mercantile Exchange’s futures market to open for a fresh opportunity to bet against the cryptocurrency, according to more than a half dozen people trading the assets.

“The futures reduce the frictions of going short more than they do of going long, so it’s probably net bearish,” said Craig Pirrong, a business professor at the University of Houston. “Having this instrument that makes it easier to short might keep the bitcoin price a little closer to reality.”....

Some see the bitcoin market as “one of the greatest shorting opportunities ever,” said Lou Kerner, a partner at Flight VC who invests in the cryptocurrency. “You have a lot of zealotry, and a lot of people, including me, who think it’s the greatest thing to ever happen in the history of mankind. You have a lot of people who think it’s a bubble and a Ponzi scheme. It turns out both of them can’t be right.”.....

on the other hand:

Ari Paul, co-founder of hedge fund BlockTower Capital and former portfolio manager at the University of Chicago endowment, said people are mistaken if they think the famously volatile cryptocurrency is a clear-cut short.

“While some traders are eager to be able to short bitcoin and will do so when the futures are launched, there is a far greater amount of money eagerly awaiting the futures as a vehicle to go long,” Paul said.

The important impact in my view to the futures is the ability to trade in amounts that would be meaningful to hedge funds and other professionals. The size of the existing market is simply too small to be of interest to them...leaving the field open mostly to those individual investors many of the type Zweig describes above.

There are limited ways to short bitcoin today, said Michael Moro, chief executive officer of Genesis Global Trading. The cryptocurrency trading platform has lent about $20 million to investors to take bearish positions, which were mostly to hedge existing bets, he said. Companies like GDAX, BitMEX and Bitfinex allow investors to buy assets on margin for short periods.

“With the existing exchanges, no one can get in and short $1 million,” Moro said. “It’s really small potatoes on what you can do today. The CME guys open up a new frontier.”

The trading starts next week...it will be interesting