If you would've told me a year ago that one day news of bitcoin would overshadow a ground-breaking update on the Brexit negotiations, I probably wouldn't have believed you.
It's now been 11 months since I made my first bitcoin video, in which I pointed to Brexit as one of the factors influencing the bitcoin price but looking at my feeds today there are only small mentions of May's all-nighter with Jean-Claude Junker in a sea of updates on cryptocurrencies.
Congratulations to the UK for completing round one of talks. Welcome to round two.
Also, the fact that today the United States will be announcing their monthly jobs report would normally be of great significance but given everything that's happening in crypto it simply doesn't seem all that important at the moment.
Now, let's talk about bitcoin's debut on Wall Street this weekend.
The Highlights
- Network Congestion Reaching Dangerous Levels
- Risks to the Entire Financial System
- Most Likely Outcomes & Opportunities
Please note: All data, figures & graphs are valid as of December 8th. All trading carries risk. Only risk capital you're prepared to lose.
The Mempool is Full!
With all the popularity and price surging lately the bitcoin blockchain is now busier than ever before and the network is now reaching max capacity!
At this moment, there are 226,000 unconfirmed transactions waiting for the miners to add them to the blockchain. This chart shows the bitcoin backlog known as the mempool over the last two weeks.
This is very close the highest level ever (231,000), which happened on May 19 (red circle).
The capacity of the network has grown since then as stronger computers have joined the mining force. Here we can see the bitcoin hashpower (network strength) growing steadily since the beginning of the year.
The issue is that even though the ability of the network to process transactions is getting stronger, the amount of transactions happening is growing faster. We're now seeing a record level of 4.67 TPS (transactions per second). Compared with 2.85 TPS back in May.
At this point, many users are complaining that transactions are being delayed. Even though many are choosing to pay a higher mining fee for priority confirmation there are still massive delays.
Regardless of what happens on Wall Street it might prove difficult for Bitcoin to make a case that it can replace government money if it is not able to get transactions through in a timely fashion.
If there is no proposal on the table soon about how to increase the blockchain's capacity, it could cause people to pull out in favor of other cryptocurrencies that are more scalable by nature.
This would of course be terrible news for John McAfee, who made an unseemly bet on Twitter that BTC will reach $500,000 in the next three years.
In my view, this price target is achievable only if we manage to vastly increase the network's capacity in short order. Of course, it's also very possible, especially in the short term, that users ignore such delays as they are blinded by the unprecedented surges in price.
Wall Sreet is Scared
The introduction of the bitcoin futures market on Wall Street is being seen as an industry game changer. Likely to the bitcoin industry but also very possibly to the entire Financial Industry, many of whom have expressed grave concerns.
The CEO of Interactive Brokers Thomas Peterffy went as far as to put out a full-page ad in the Wall Street Journal warning of the potential risks to the system. As well, the CEO of the Futures Industry Association has written a strongly worded letter to the CFTC urging them to put the brakes on these potentially hazardous contracts.
The main issue is that bitcoin's inherent volatility may present way more risk than these large financial firms are used to seeing. With regular price swings of more than 20% in a single day and volumes that are upward of $20 Billion.
As futures contracts only require a portion of the money to be put up front, the concern is that if clients incur large losses on bitcoin they may not be able to pay the money back. This would then put the clearing houses at risk.
For a better understanding, please see this video from Investopedia on how clearinghouses work.
Even though the clearinghouses plan to increase their margin requirements for bitcoin assets, many worry that it simply will not be sufficient to guard against heavy client losses.
These same clearinghouses also deal with many other futures contracts. So if one of them suddenly went bankrupt it could in turn affect other commodities and financial assets, which could spark a chain reaction with the potential to destabilize the entire financial system.
The solution here would be to create isolated clearinghouses to deal with crypto-related products but because Wall Street is in such a rush to meet their client's demands they have effectively thrown caution to the wind.
What Happens Sunday?
This Sunday, the CBOE will open up its new futures contract on bitcoin for client trading. The CME Group (NASDAQ:CME) plans to do the same on Monday the 18.
Similar to the way crypto-exchanges work, the CBOE is only the facilitator of orders. So, in the beginning, it will only be CBOE's clients, mainly top-tier banks and hedge funds who will have access to begin trading.
Many of these banks have already stated that they will not be joining in immediately and that they prefer to gauge the risk before entering the market. But some will.
As their order books begin to fill, the process of price discovery begins. If the sell orders begin to pile up, as many analysts believe they will, then the price of the futures market will decline.
However, as the contracts are not backed by actual bitcoin and there is no natural liquidity flows between the crypto exchanges and the Banking system, the price of the futures contracts will likely remain disconnected from the rest of the market.
The Liquidity Scene
Even when dealing with bitcoin itself, there is already a very wide difference in prices between different exchanges. This can be seen on sites like cryptowat.ch
This is because each exchange is in a different location and has a completely separate flow of supply and demand.
In eToro, I've seen first hand our dealers digging in the trenches of liquidity in order to optimize this price discovery for our clients. Let me tell you, these suited up Wall Street guys have no idea what they're in for.
Price Impact
Initially, it will likely be quite insignificant. Most large asset managers are more conservative and so are less likely to dive headfirst into a market they barely understand.
So whatever the initial prices on CBOE show, it will be difficult to convince hordes of crypto traders in South Korea who are eager to replace government money that Wall Street understands this market better than they do.
Hopefully, we will see things begin more gradually on Wall Street. As the various banks and institutions come online they will add to the overall liquidity of this already massive marketplace.
Of course, anything can happen really and hindsight is always 20/20. 2017 will certainly be remembered as the year of crypto regardless of how things play out over the next 3 weeks.
Wishing you a truly awesome weekend!
eToro, Senior Market Analyst
Disclosure: This content is for information and educational purposes only and should not be considered investment advice or an investment recommendation. Past performance is not an indication of future results. All trading carries risk. Only risk capital you're prepared to lose.