Bitcoin Futures to Blame for Crypto Market’s “Gut-Wrenching” Drop, Says Fundstrat Analyst Tom Lee

Omar Faridi
  • Fundstrat analyst Tom Lee wrote that bitcoin futures reaching their expiration dates are to blame for the cryptocurrency market’s recent drop.
  • The data science expert believes that institutional investors have not made substantial investments in the cryptocurrency market due to a lack of proper tools.

Fundstrat Global Advisors co-founder Thomas Lee recently stated that the sharp drop in bitcoin’s price may be linked to the expiration of bitcoin futures contracts. According to Lee, the “significant volatility” of the flagship cryptocurrency could be due to CME and Cboe futures having reached their expiration dates.

Moreover, the data science expert believes that while technical issues and market sentiment have been “awful”, the expiration of bitcoin futures might have played a bigger role in the decline of bitcoin’s market capitalization. The Fundstrat head of research said:

“Bitcoin sees dramatic price changes around CBOE futures expirations. We compiled some of the data and this indeed seems to be true.”

Tom Lee

Lee pointed out that since Cboe’s bitcoin futures contractswere introduced in December 2017, they have expired six times, with the most recent one expiring on June 13. Citing Raptor Capital Management crypto investor Justin Saslaw’s analysis, Lee thinks that the drop in bitcoin’s price can be attributed to the expiration of bitcoin futures contracts.

In his report, the Fundstrat analyst notes that bitcoin's price fell approximately 18 percent 10 days prior to the financial products’ expiration, followed by a recovery felt 6 days after expiration.

“Handsome Profits” Shorting BTC Futures

Lee noted that should people short bitcoin futures as they approach their expiration date and go long on the cryptocurrency, investors could sell a big portion of their holdings at volume-weighted average price (VWAP) with a minimal tracking error.

He also added that the bitcoinsleft could be sold as the expiration date approaches, which would result in declining prices. This way, those who short futures could end up “with a handsome profit”, Lee says.

Commenting on the current cryptocurrency market, the Fundstrat analyst stated that tools to attract institutional investors have not yet been properly developed, which has kept them from investing. He also wrote that numerous initial coin offerings (ICOs) and large amounts of cryptocurrency earned by miners, along with taxed capital gains, have resulted in a significantly greater net supply this year. Notably, Lee has in the past stated he sees bitcoin hit $25,000 by the end of the year, and $91,000 by March 2020.

Interestingly, Lee’s report has come at a time when the US Commodity Futures Trading Commission (CFTC) launched an investigation into four large cryptocurrency exchanges: Coinbase, Kraken, itBit, and Bitstamp.

All four exchanges have been sharing their financial data with the CME Group, which introduced BTC futures in December 2017. The CFTC probe is reportedly due to allegations regarding potential market manipulation.

Investing in Cryptocurrencies Right Now May Not Be a Bad Idea. Here’s Why

More often than not we hear cryptocurrencies are an extremely risky investment that no one knows how it’ll play out. In this article we’ll look at the markets, and make a case for cryptocurrencies like bitcoin as a sound investment.

Negative-Yielding Debt

First, let’s take at bonds throughout the world and current interest rates, to analyze their influence on the equity markets. Earlier this month, the yield on the 30-year US Treasury Bond hit an all-time low below 2%, an alarming drop to some investors.

This, as investors are now loaning money to the US Federal Government for thirty years at a rate that’ll barely see their value keep up with inflation. While the rate has slightly recovered since, it’s still flirting with the 2% mark.

CNBC data shows that yields for U.K. government bonds on the other hand are all well below the 1% mark, while Germany Government Bonds are now all negative, with the 4-year bond having a rate of minus 0.93%. Investors are paying the government to lend it money.

This isn’t just the case in Germany. Italy, France, Japan, and various other countries have negative bond yields. It’s estimated, in fact, that negative-yielding debt is now over $15 trillion. As Bloomberg reports Austria has issued a 100-year bond with a yield of only 1,2%.

Equities Are Overvalued

The above makes it clear that the search for yields has made the unthinkable possible: investors are loaning the Austrian government for a century for a yield that won’t keep up with inflation.

This also means some are turning to the equity market in search of returns with their capital. As a result most stocks appear to be overvalued, so much so that legendary investor Warren Buffett admitted earlier this year low interest rates inflated asset values to the point his company ,Berkshire Hathaway, can’t find bargains.

A commonly used example is that of WeWork, a company that leases office space and is looking at an initial public offering (IPO) that’ll value it at nearly $50 billion. WeWork, ZeroHedge reports, has never turned a profit, nor is it expecting to do so in the foreseeable future.

Moreover, it leases office space but owns no real estate. Its co-founder and CEO, Adam Neuman, reportedly sold millions worth of stock to instead buy buildings it’ll lease to WeWork. Moreover, it issued non-voting shares, allowing Adam to essentially keep holding a controlling stake in the firm.

These red flags haven’t gone unnoticed. The S&P 500, the U.S. stock market’s benchmark index, has been struggling ever since it hit an all-time high of 3,000 earlier this year. Overall, we’ve now got a stock market close to its all-time high, bond close to an all-time high with interest rates in the negative or that can’t keep up with inflation, and property prices near all-time highs.

Considering Dividends

It may be argued that being in the stock market for a long period may yield better returns as it always seems to bounce back off recessions, and investors can just keep collecting dividends until the market recovers.

While this has so far been true for the U.S. equity market, things aren’t always what they seem to be. The Nikkei 225, the Tokyo Stock Exchange’s benchmark index, hasn’t yet recovered from an asset bubble it faced between 1986 and 1991, in which stock market prices were inflated to the point the index reached an all-time high near 40,000. Decades later, it’s still at 20,400.

Nikkei's price performance over the last few decadesSource: Yahoo Finance

Those who’ve put their money on the S&P 500 may now not be so lucky, taking into account the 10-year bullrun the U.S. stock market has been enjoying. While dividends will pile up in the long run, they may also not make up for losses.

Furthermore, it’s now also possible to earn interest on cryptocurrency holdings. Some crypto exchanges let users lend tokens to magin traders, in exchange for an above-average APR if we take into account current bond yields.

For example OKEx, a leading cryptoasset exchange, offers users a service called OK Piggybank, which lets them deposit 14 different cryptocurrencies - including BTC, BCH, LTC, ETH, EOS, and TRX - to earn interest that’s currently going as high as 6% a year.

Using services like OK Piggybank cryptocurrency investors accrue interest on a daily basis as their funds are loaned to margin traders, and they receive a portion of the revenue from these loans. On OKEx they keep 85% of the revenue, with the exchange taking 15% to add to its margin trading insurance fund.

The offer is, to some, attractive because managing a cryptocurrency wallet is hard. There are hundreds of stories online about users who’ve lost thousands because they lost their private keys - something that doesn’t happen when the funds are in an exchange.

Granted, others argue that controlling your own keys is the only way to do it.  There are other ways to earn interest in the crypto space: decentralized applications on the Ethereum blockchain like Compound and Uniswap let users add liquidity to their protocols using ETH and various ERC-20 tokens to earn interest that has at times surpassed 10% APR.

Turning to Safe Havens

All of this has seen various investors turn to safe havens like gold and even other precious metals. Available market data shows that since the beginning of this year the price of gold has indeed gone up, as the U.S.-China trade war progresses and other markets appear to be overvalued.

Gold's price performance YTDSource: Yahoo Finance

The precious metal has a history of over 5,000 years backing up its status as a safe haven, and there are no arguments about that. However, it isn’t the best idea to put all our eggs into one basket.

While Electrum Group founder Thomas Kaplan believes gold could hit $5,000, others like Gemini co-founder and CEO Tyler Winklevoss, believe bitcoin is “gold 2.0,” and that the cryptocurrency has a chance to take some of the precious metal’s $7 trillion market cap. Bitcoin current market cap is of $181 billion, meaning there’s a lot of room to grow if it is indeed gold 2.0.

The cryptocurrency ecosystem as a whole hasn’t reached a $1 trillion market cap, even during the 2017 bull run. Some believe Facebook’s soon-to-be-launched cryptocurrency Libra will help familiarize millions with cryptocurrencies, while Bakkt could help bring in institutional investors.

Important information: please remember that the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. If you are unsure of the suitability of your investment please seek advice. Tax rules can change and the value of any benefits depends on individual circumstances.