Although previous Bitcoin (BTC) halvings have all led to a rise in price both before and after the event occurred, this time may play out differently due to the emergence of a whole new derivatives market for bitcoin, one of the largest derivatives exchanges in the world, CME Group, said.
The third BTC mining reward halving, that is estimated to happen this evening (UTC time), may have a smaller impact on the price of bitcoin than what has traditionally been expected around such events, Payal Lakhani, Director of Equity Research and Product Development at CME Group, said in a recent blog post.
The reason for this, according to her, is that miners – who are considered to be among the biggest sellers of bitcoin in the market – now have a larger number of tools at their disposal to manage price risk that didn’t previously exist.
“The 2020 halving event has several additional factors than previous such events including the availability of CME Bitcoin futures and options, which investors and miners can use to hedge or express views on the bitcoin price,” Lakhani said.
She stressed that this changes the narrative around the halving for three key reasons:
- it enables price risks to be hedged,
- demand risk for bitcoin can be managed,
- speculators can look to the indicators of options pricing.
Although it is the effect of miners being rewarded with less bitcoin, and thus being able to sell fewer bitcoin on the open market, that is widely expected to provide a positive boost to the bitcoin price, these miners are to a much lesser extent forced to sell their coins these days, the Director argued.
“Now, with a liquid derivatives market, it is possible [for miners] to hedge and lock in future bitcoin prices in order to cover expenses without selling bitcoin,” she wrote, while noting that the reduced selling “is less likely to act as a drag on bitcoin prices going forward.”
“A robust options market could also allow for additional income to be earned by miners or enhance long bitcoin positions which would further cushion the impact of the upcoming halving,” Lakhani added.
Meanwhile, CME also said that they have seen record-high open interest in both bitcoin futures and options in the days and weeks leading up to the halving, with an all-time high of BTC 48,915 traded in the form of futures contracts during the strong rally on May 7, when BTC briefly touched the USD 10,000 mark.
Also, year to date Bitcoin futures average daily volume reached 8,456 contracts, up 43% compared to the same period in 2019. Options on Bitcoin futures total volume is now over 2,250 contracts and a record 216 contracts traded on May 6, according to CME.
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