CME ETH FUTURES LAUNCH
Monday, February 8, 2021, the CME Group, one of the world’s leading derivative marketplace will launch Ether futures.
A futures contract is a legally binding agreement to buy or sell a standardized asset on a specific future date or during a specific month. Second, this transaction is facilitated through a futures exchange. The buyer of a futures contract is taking on the obligation to buy and receive the underlying asset when the futures contract expires.
The seller of the futures contract is taking on the obligation to provide and deliver the underlying asset at the expiration date. There is much speculation around what this can do for the price of Ether in the short and longer term. The CME group launched Bitcoin futures back in December 2017, right at the peak of the Bitcoin bull market, and we quickly saw Bitcoin prices tumble down into a multiyear bear market. Some have blamed CME futures, but it could have more to do with timing of CME Bitcoin futures entering the market rather than CME futures causing the price to tumble.
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There are some major differences to when CME Bitcoin futures started and where the Ether market is today. We will look at those differences and a few similarities below, but let’s take a look at what Ether and Ethereum actually are.
Bitcoin may have stolen the spotlight for most of 2020, but Ethereum has been like a fast moving train,constantly picking up speed and momentum in terms of development. Ethereum is the decentralized network featuring its cryptocurrency, Ether, along with thousands of ERC20 tokens, and allows for execution of smart contracts. Smart contracts are self-executing programs with predetermined terms set in that allow two or more parties to execute anonymously, even if they do not trust each other.
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Last year saw a massive rise in this technology being used to create Decentralized Finance tools, also called Defi. Ether can be considered programmable money. This also means Ethereum is for more than payments. It is a marketplace of financial services, games and apps that can't steal your data or censor you. The Ethereum community is building a whole financial system that's peer-to-peer and accessible to everyone.
You can use Ether as collateral to generate entirely different cryptocurrency tokens on Ethereum. Plus you can borrow, lend and earn interest on Ether and other Eth-backed tokens. The Ethereum ecosystem has grown into a robust system since its launch in 2014. Many will argue it has the most active ongoing development of any network in existence. All of these reasons lead to a high demand for Ether and you can clearly see why it is currently the number 2 cryptocurrency in terms of market capitalization.
Now, let’s take a look at potential scenarios of how the launch of CME Ether Futures may or may not affect the price of Ether. On the surface, many would think that the additional exposure to Ether would lead to a massive rise in the price. However, if you look back in 2017 when Bitcoin futures were added, you will see there was a massive dump in Bitcoin price shortly after. Plus, Futures contracts do not trade in the actual asset. It is paper contracts that are settled in dollars. So it is basically betting on the market without actually buying or selling the asset.
Futures can either buy long, which in essence is betting that the price will be higher when contract expires, or sell short, which means you are betting on price to be lower when contract expires. The launch of Eth futures comes just 2 days after Ether hit a new all time high above $1700. Many are comparing the similarity to Bitcoin Futures launch in 2017 to now as both Bitcoin and Ether hit all time highs before the launch of their CME futures.
Some who feel that this history can repeat itself feel that this will lead to a tumble in the price of Ether. The time of the all time high prices of Bitcoin and Ether are pretty much where the similarities end. Some fundamentals that could see Ether price drop in the short term could revolve around the current high network gas fees to transact on the Ethereum network and normal retracements of a sustained upward trend. Eth2.0 is poised to solve high gas fees, but is still at least a year or two from full scale rollout.
Moving on to what is different will show you why there may be completely different effects, or in essence, no major effect on the current trend of the Ether price. The Bitcoin all-time high in 2017 was after a massive, blow-off top spike in Bitcoin price that many feel would have corrected regardless of any launch of CME futures. Bitcoin saw an almost 10x increase from summer 2017 to its previous all time high in December 2017.
Meanwhile, Ether’s new all time high is only about 20% higher than the previous high from early 2018. With the demand for Ether so high and so much development happening, we could easily see the Ether bull trend continue to drive the price up with brief moments of pullbacks and consolidation on the way higher. When Bitcoin futures launched, there was around $5-7 Billion of daily trading volume which spiked to around $12-14 Billion daily trading volume shortly after, partially from hype and partially from increase in Bitcoin value.
ETH/BTC
The market has matured quite a bit in terms of diversity in holdings and trading offerings. Currently Ether is experiencing around $40 billion in daily trading volume on average. Even JP Morgan estimates that CME Ether futures will have an initially low amount of trading volume. In essence, the launch of CME futures could not be an impactful event at all as many looking to trade these futures will probably look for indications of either a continuation or a reversal of the trend.
This is where I am leaning in that I feel the launch of CME Ether futures will not have a major impact on price action. However, that is just my opinion and I have my trade risk management set just in case I am wrong, and you should too. Make sure to do your own research and determine your strategy.
If you are a long term believer in Ether and not trading it, this event should have little impact on you. In that case, you would continue to accumulate Ether no matter what the price does in the short term. Some other bullish cases for Ether long term are the fact that there is currently over $30 billion dollars in TVL, or Total Value Locked, in Defi protocols on the Ethereum network. Of that, over $11 billion is locked in Ether. Also, Grayscale Trust has been bullish on Ether and currently has accumulated over $5 billion in Ether. The biggest argument as to why this is different is that we are currently in the early stages of the current cryptocurrency bull market trend, whereas, in 2017, that was at the tail end of that bull market trend.
With all that being said above, it is important to make sure you are educated and informed of your decisions when it comes to investing and trading. We have seen a surge recently of people blindly throwing money at different cryptocurrencies without even understanding the basics of why or why not to buy or trade that particular one. Some will make money without even understanding how they did it, but many could be on the losing end as these inorganic pumps always end with a dump, with many uneducated victims holding bags of cryptocurrencies that are way down in value from when they bought. If you partake in this activity, just know that is no different than gambling and you could lose your money easily. More lose than win in that situation. Spend time in the Newscrypto school(https://platform.newscrypto.io/school/) and exploring all the tools on the Newscrypto platform to sharpen your knowledge and your skills. And make sure to have the newly released Newscrypto app on your phone to keep up with everything happening in the market. Learn more about the app here.
Content written by Blockchain Wayne and NewsCrypto Team
