Will the Next Bitcoin Halving Unleash a New Crypto Bull Market? 1

Will the Next Bitcoin Halving Unleash a New Crypto Bull Market?

Crypto Industry
Digitex Futures
Trading
• Dave Reiter
February 27, 2020

With the exception of May and June, 2019 was a rather uneventful year for Bitcoin and the entire crypto universe. Bitcoin traded sideways-to-lower following its price peak on 26 June (see Chart #1 below). Although the number-one cryptocurrency has started 2020 with a bang representing a 44% rate of return so far this year, cryptocurrencies still need some type of event to serve to reestablish a new bull market. It wasn’t the launch of Bakkt, so could it be the next Bitcoin halving?

The Next Crypto Bull Market

Many traders and investors within the crypto community expected the launch of Bakkt to generate a new wave of buying pressure for BTC and other cryptocurrencies. However, buying never materialized. In fact, Bitcoin was much lower shortly afterward in comparison to the Bakkt launch date on 23 September (see Chart #2 below). 

What will it take to unleash a new crypto bull market? Has it already begun? Many cryptocurrency traders are convinced that the next Bitcoin halving in May 2020 will create a powerful new bull market. But what is the Bitcoin halving and why could it generate a new run? Let’s explore the details.

Bitcoin Halving Has a Perfect Track Record for Launching Bull Markets       

Arguably, Bitcoin’s greatest feature is the fact that Satoshi Nakamoto only created 21 million coins. There will never be more than 21 million bitcoins in circulation. It was pure “genius” for Nakamoto to strictly limit the supply of BTC. This is what separates BTC from fiat currencies. Without having a limited amount of bitcoins, cryptocurrencies would be no better than paper currencies.

BTC and other cryptos would eventually become worthless in terms of purchasing power. Of course, this is exactly what has befallen fiat currencies. Their purchasing power has slowly eroded over the course of the past several decades. By restricting the number of bitcoins, cryptocurrency investors will never have to deal with this decline in purchasing power. This is what makes cryptocurrencies an excellent store of value.

As you know, bitcoins are entered into circulation through the process of mining. Essentially, BTC mining is the process of adding transaction records to Bitcoin’s public ledger of past transactions. Added together, these past transactions create a chain of blocks, known as a blockchain. Miners are rewarded when a new block is discovered. Currently, the reward is 12.5 BTC.

In addition to limiting the number of bitcoins to 21 million, Nakamoto made a brilliant decision to gradually reduce the mining reward as new bitcoins were added into circulation. The number of bitcoins generated per block is set to decrease geometrically, with a 50% reduction every 210,000 blocks, which should occur approximately every four years. Ultimately, this will result in a total of 21 million Bitcoins in circulation.                 

The Importance of Capping Bitcoin’s Supply

Why was Nakamoto’s decision to reduce the mining reward such a brilliant decision? Because it dramatically increases the odds of a steady increase in the price of Bitcoin well into the future. A reduction in the BTC mining reward is known as a “Bitcoin halving.” 

Whenever a halving occurs, it automatically reduces the BTC mining reward by 50%. As discussed earlier, the current Bitcoin mining reward is 12.5 bitcoins for the discovery of a new block. The next Bitcoin halving is scheduled for May 2020, when the mining reward will be cut in half to 6.25 BTC. 

What has happened to the price of BTC during previous Bitcoin halving occurrences? Let’s examine the data.

Pssst… It isn’t just Bitcoin that’s got sky’s the limit potential… If you want to get involved in the next revolution in crypto derivatives trading, you can buy our native exchange token DGTX by clicking on the button below. You’ll get an instant transaction with zero slippage buying directly from the Digitex Treasury including a 10% bonus airdropped into your account upon the mainnet launch.

BUY DGTX
BTC Price After Bitcoin Halving

The first Bitcoin halving occurred on 28 November 2012, when the mining reward was reduced to 25 bitcoins. At the time of the halving, the price of BTC was approximately $11. Over the course of the next 12 months, Bitcoin enjoyed a dramatic bull market. BTC reached a peak of $1,135 on 29 November 2013. 

This represents an amazing price increase of 10,218%. 

The next Bitcoin halving occurred on 16 July 2016. The mining reward was reduced to 12.5 bitcoins per block. What happened to the price of BTC following the reduction in the mining reward? Initially, nothing. 

In fact, for several months after the mining reward was reduced, BTC was locked in a boring trading range between $500 and $800. The trading range continued for five months, July through December 2016.

Many traders in the crypto community began to doubt whether the 2016 halving would generate a substantial rally similar to the 2012 halving. Finally, on 21 December 2016, BTC generated a bullish breakout, when the price penetrated $800. The halving rally was underway! 

Bitcoin exploded to the upside throughout the next 12 months. The final top was obtained on 18 December 2017 @ $19,862. In percentage terms, BTC enjoyed a rally of 2,847%. Please review the following table. 

Bitcoin Halving

2012 – 2016 

Halving Date         Bitcoin Price          Price Peak             Peak Date  % Increase

 

28 Nov 2012          11                           1,135                      29 Nov 2013  10,218%

 

16 Jul 2016            674                         19,862                   18 Dec 2017  2,847%

 

Source  Forbes Magazine

Will the May 2020 Bitcoin Halving Unleash a Bull Market? 

Of course, it’s impossible to predict the future direction of any speculative asset. However, based on previous Bitcoin halving occurrences, it’s fairly safe to assume that BTC will generate some type of rally following the May 2020 halving. Let’s attempt to calculate an educated guess regarding the size of the rally.

Unfortunately, we only have two previous Bitcoin halving episodes. Therefore, our data sample is very small. Let’s assume that BTC is trading near its current price of $7,400 in May 2020. Given the fact that BTC is trading at a substantially higher price compared to the 2012 halving and 2016 halving, it’s highly unlikely that Bitcoin will enjoy such a dramatic percentage price increase for the May 2020 halving.

In fact, you can see that there was a dramatic reduction in percentage gains in 2016 versus 2012. Bitcoin’s gain from the 2016 halving was 72% less than the gain from the 2012 halving.

 In an attempt to calculate a price forecast for the upcoming May 2020 halving, let’s assume that the Bitcoin halving rally will be 72% less than the 2016 halving rally. If we use these numbers in our calculation, we can conclude that BTC will enjoy a substantial gain of 797%. 

Based on a price of $7,400, Bitcoin will reach a peak of $58,978 within 12 to 18 months from May 2020. Therefore, the price peak will occur between May 2021 and November 2021.

Of course, nobody should take these forecasts too seriously. Several things can change within the crypto universe before May 2020. Additionally, there is absolutely no guarantee that Bitcoin will rally following the May 2020 halving. There is no rule which says that BTC must rally following each halving. 

However, given the fact that the BTC mining reward will be cut in half, it’s probably safe to assume that there will be at least a modest rally. Without question, it will be very exciting to watch the price of Bitcoin as we approach the May 2020 halving.

JOIN NOW

Full Disclosure: I own BTC on the spot market, BTC futures and BTC exchange-traded notes.  

 

 

February 27, 2020
Crypto Industry
Digitex Futures
Trading

Will the Next Bitcoin Halving Unleash a New Crypto Bull Market?

Dave Reiter
Will the Next Bitcoin Halving Unleash a New Crypto Bull Market? 2

With the exception of May and June, 2019 was a rather uneventful year for Bitcoin and the entire crypto universe. Bitcoin traded sideways-to-lower following its price peak on 26 June (see Chart #1 below). Although the number-one cryptocurrency has started 2020 with a bang representing a 44% rate of return so far this year, cryptocurrencies still need some type of event to serve to reestablish a new bull market. It wasn’t the launch of Bakkt, so could it be the next Bitcoin halving?

The Next Crypto Bull Market

Many traders and investors within the crypto community expected the launch of Bakkt to generate a new wave of buying pressure for BTC and other cryptocurrencies. However, buying never materialized. In fact, Bitcoin was much lower shortly afterward in comparison to the Bakkt launch date on 23 September (see Chart #2 below). 

What will it take to unleash a new crypto bull market? Has it already begun? Many cryptocurrency traders are convinced that the next Bitcoin halving in May 2020 will create a powerful new bull market. But what is the Bitcoin halving and why could it generate a new run? Let’s explore the details.

Bitcoin Halving Has a Perfect Track Record for Launching Bull Markets       

Arguably, Bitcoin’s greatest feature is the fact that Satoshi Nakamoto only created 21 million coins. There will never be more than 21 million bitcoins in circulation. It was pure “genius” for Nakamoto to strictly limit the supply of BTC. This is what separates BTC from fiat currencies. Without having a limited amount of bitcoins, cryptocurrencies would be no better than paper currencies.

BTC and other cryptos would eventually become worthless in terms of purchasing power. Of course, this is exactly what has befallen fiat currencies. Their purchasing power has slowly eroded over the course of the past several decades. By restricting the number of bitcoins, cryptocurrency investors will never have to deal with this decline in purchasing power. This is what makes cryptocurrencies an excellent store of value.

As you know, bitcoins are entered into circulation through the process of mining. Essentially, BTC mining is the process of adding transaction records to Bitcoin’s public ledger of past transactions. Added together, these past transactions create a chain of blocks, known as a blockchain. Miners are rewarded when a new block is discovered. Currently, the reward is 12.5 BTC.

In addition to limiting the number of bitcoins to 21 million, Nakamoto made a brilliant decision to gradually reduce the mining reward as new bitcoins were added into circulation. The number of bitcoins generated per block is set to decrease geometrically, with a 50% reduction every 210,000 blocks, which should occur approximately every four years. Ultimately, this will result in a total of 21 million Bitcoins in circulation.                 

The Importance of Capping Bitcoin’s Supply

Why was Nakamoto’s decision to reduce the mining reward such a brilliant decision? Because it dramatically increases the odds of a steady increase in the price of Bitcoin well into the future. A reduction in the BTC mining reward is known as a “Bitcoin halving.” 

Whenever a halving occurs, it automatically reduces the BTC mining reward by 50%. As discussed earlier, the current Bitcoin mining reward is 12.5 bitcoins for the discovery of a new block. The next Bitcoin halving is scheduled for May 2020, when the mining reward will be cut in half to 6.25 BTC. 

What has happened to the price of BTC during previous Bitcoin halving occurrences? Let’s examine the data.

Pssst… It isn’t just Bitcoin that’s got sky’s the limit potential… If you want to get involved in the next revolution in crypto derivatives trading, you can buy our native exchange token DGTX by clicking on the button below. You’ll get an instant transaction with zero slippage buying directly from the Digitex Treasury including a 10% bonus airdropped into your account upon the mainnet launch.

BUY DGTX
BTC Price After Bitcoin Halving

The first Bitcoin halving occurred on 28 November 2012, when the mining reward was reduced to 25 bitcoins. At the time of the halving, the price of BTC was approximately $11. Over the course of the next 12 months, Bitcoin enjoyed a dramatic bull market. BTC reached a peak of $1,135 on 29 November 2013. 

This represents an amazing price increase of 10,218%. 

The next Bitcoin halving occurred on 16 July 2016. The mining reward was reduced to 12.5 bitcoins per block. What happened to the price of BTC following the reduction in the mining reward? Initially, nothing. 

In fact, for several months after the mining reward was reduced, BTC was locked in a boring trading range between $500 and $800. The trading range continued for five months, July through December 2016.

Many traders in the crypto community began to doubt whether the 2016 halving would generate a substantial rally similar to the 2012 halving. Finally, on 21 December 2016, BTC generated a bullish breakout, when the price penetrated $800. The halving rally was underway! 

Bitcoin exploded to the upside throughout the next 12 months. The final top was obtained on 18 December 2017 @ $19,862. In percentage terms, BTC enjoyed a rally of 2,847%. Please review the following table. 

Bitcoin Halving

2012 – 2016 

Halving Date         Bitcoin Price          Price Peak             Peak Date  % Increase

 

28 Nov 2012          11                           1,135                      29 Nov 2013  10,218%

 

16 Jul 2016            674                         19,862                   18 Dec 2017  2,847%

 

Source  Forbes Magazine

Will the May 2020 Bitcoin Halving Unleash a Bull Market? 

Of course, it’s impossible to predict the future direction of any speculative asset. However, based on previous Bitcoin halving occurrences, it’s fairly safe to assume that BTC will generate some type of rally following the May 2020 halving. Let’s attempt to calculate an educated guess regarding the size of the rally.

Unfortunately, we only have two previous Bitcoin halving episodes. Therefore, our data sample is very small. Let’s assume that BTC is trading near its current price of $7,400 in May 2020. Given the fact that BTC is trading at a substantially higher price compared to the 2012 halving and 2016 halving, it’s highly unlikely that Bitcoin will enjoy such a dramatic percentage price increase for the May 2020 halving.

In fact, you can see that there was a dramatic reduction in percentage gains in 2016 versus 2012. Bitcoin’s gain from the 2016 halving was 72% less than the gain from the 2012 halving.

 In an attempt to calculate a price forecast for the upcoming May 2020 halving, let’s assume that the Bitcoin halving rally will be 72% less than the 2016 halving rally. If we use these numbers in our calculation, we can conclude that BTC will enjoy a substantial gain of 797%. 

Based on a price of $7,400, Bitcoin will reach a peak of $58,978 within 12 to 18 months from May 2020. Therefore, the price peak will occur between May 2021 and November 2021.

Of course, nobody should take these forecasts too seriously. Several things can change within the crypto universe before May 2020. Additionally, there is absolutely no guarantee that Bitcoin will rally following the May 2020 halving. There is no rule which says that BTC must rally following each halving. 

However, given the fact that the BTC mining reward will be cut in half, it’s probably safe to assume that there will be at least a modest rally. Without question, it will be very exciting to watch the price of Bitcoin as we approach the May 2020 halving.

JOIN NOW

Full Disclosure: I own BTC on the spot market, BTC futures and BTC exchange-traded notes.  

 

 

Latest News

DGTX: Your Gateway to Free Trading 3

DGTX: Your Gateway to Free Trading

Digitex Futures
Trading
• Christina Comben
September 21, 2019

There are more than 500 cryptocurrency exchanges out there with more and more cropping up all the time. There are also plenty of new entrants in the cryptocurrency derivatives space. Amid rising competition and a BTC futures market set to get parabolic, many people ask why we need another crypto futures exchange. Well, the answer is because Digitex is not just another crypto futures exchange and DGTX is not just another exchange token! Read on to find out more.
Continue reading

September 21, 2019
Digitex Futures
Trading

DGTX: Your Gateway to Free Trading

Christina Comben
DGTX: Your Gateway to Free Trading 4

There are more than 500 cryptocurrency exchanges out there with more and more cropping up all the time. There are also plenty of new entrants in the cryptocurrency derivatives space. Amid rising competition and a BTC futures market set to get parabolic, many people ask why we need another crypto futures exchange. Well, the answer is because Digitex is not just another crypto futures exchange and DGTX is not just another exchange token! Read on to find out more.
Continue reading

Latest News

Parabolic Growth Is Coming for BTC Futures 5

Parabolic Growth Is Coming for BTC Futures

Crypto Industry
Digitex Futures
• Christina Comben
September 2, 2019

BTC futures are often met with mixed reactions. After all, it was almost entirely after their introduction into the space that the price of BTC crashed by epic proportions. With a purely speculative user base, BTC futures traders, unlike diehard HODLers, aren’t deterred by downswings in bitcoin’s price. They can still make money by shorting BTC without ever having to take physical delivery. All that is about to change. Continue reading

September 2, 2019
Crypto Industry
Digitex Futures

Parabolic Growth Is Coming for BTC Futures

Christina Comben
Parabolic Growth Is Coming for BTC Futures 6

BTC futures are often met with mixed reactions. After all, it was almost entirely after their introduction into the space that the price of BTC crashed by epic proportions. With a purely speculative user base, BTC futures traders, unlike diehard HODLers, aren’t deterred by downswings in bitcoin’s price. They can still make money by shorting BTC without ever having to take physical delivery. All that is about to change. Continue reading

Latest News

Is Bitcoin on The Path to Becoming The World’s Reserve Currency? 7

Is Bitcoin on The Path to Becoming The World’s Reserve Currency?

Crypto Industry
Digitex Futures
• Dave Reiter
August 6, 2019

When Satoshi Nakamoto mined the Bitcoin genesis block in January 2009, nobody could have predicted that ten years later, the financial community would seriously be discussing the possibility of Bitcoin becoming the world’s reserve currency. Not even the most ardent crypto-bulls would have even imagined that BTC could one day achieve such a coveted status.
But what does it mean to become a reserve currency and what’s the likelihood that Bitcoin will actually replace the US Dollar as the world’s most important monetary unit? Let’s examine the details.
As the name implies, a reserve currency is a unit of account held in large quantities by governments, institutions and global central banks. The world’s reserve currency is the largest holding within each country’s foreign exchange reserves. It separates itself from other currencies based on the fact that it is predominately used in international transactions, international investments and all aspects of the global economy. 
Consequently, the world’s reserve currency must be incredibly stable, universally accepted and attached to a fairly stable government. 

US Dollar Becomes the World’s Reserve Currency

Contrary to popular belief, the US Dollar hasn’t been the world’s reserve currency for hundreds of years. Officially, the US Dollar became the world’s reserve currency in July 1944, during the Bretton Woods Conference. The conference was a gathering of 44 nations with the shared purpose of establishing a new global monetary system to take effect after the conclusion of the war.
The Bretton Woods Conference was a rather lengthy affair, lasting almost the entire month of July 1944. During the final few days of the conference, all participating countries signed the “Bretton Woods Agreement,” which established guidelines and parameters for promoting free trade and capital flows between countries. 
Additionally, each Bretton Woods participant signed a formal accord stating that all countries would link their respective domestic currencies to the US dollar via a fixed exchange rate mechanism. In return, the US dollar would be linked to the price of gold, so that all participating countries could redeem their dollars for gold on demand. 

As a result of this agreement, the US dollar became the de facto World Reserve Currency.       

Financial historians claim that the Bretton Woods Conference was the most successful meeting of the 20th century between multiple countries. Why? Because it created an atmosphere of free trade, transfers of investment capital between countries, economic cooperation, and a stable global currency arrangement. 
For the first time in modern history, nations had a system in place that promoted and encouraged economic prosperity for all participants. 
Unfortunately, the Bretton Woods Agreement slowly began to disintegrate in the 1960s, as the United States dramatically increased the issuance of US dollars as a means of financing the war effort in Vietnam. Furthermore, the US government implemented several domestic social programs in an attempt to stimulate the economy. 
Countries who were holding US Dollars in accordance with the Bretton Woods Agreement began to increase the conversion rate of the dollar to gold. By the early 1970s, the demand for gold had peaked to the level that President Nixon abolished the convertibility of gold for Bretton Woods participants. 
Nixon officially closed the “gold window” on 15 August 1971, essentially bringing the Bretton Woods Agreement to an end after 37 years.

The US Dollar Prevails by Default

Upon the termination of the Bretton Woods Agreement, the global currency system moved to a floating exchange rate system. This system has now been in place continuously for the past five decades. The US dollar still remains the World’s Reserve Currency. In fact, the dollar easily leads all other industrialized nations for daily currency transactions between countries. Additionally, the world’s central banks hold an inordinate value of US dollars as a percentage of their total reserves.
However, during the past few decades, a growing number of international economists, global business executives, foreign leaders, foreign politicians and professional traders within the investment community have called for a new monetary system. Prior to the unveiling of Bitcoin in 2009, the majority of experts were in favor of organizing a “Bretton Woods 2.0 Conference,” for the sole purpose of outlining a new global currency system. 
Although the conference was never held, the prevailing view was that it could establish a new World Reserve Currency, consisting of a basket of currencies from the most economically influential countries. This basket of currencies would be managed by the International Monetary Fund (IMF). The basket would be known as Special Drawing Rights (SDR). 
But, so far, this concept has never come to fruition.

Is Bitcoin Suitable for Becoming the World’s Reserve Currency?        

The introduction of Bitcoin in 2009 has sparked a renewed effort to adopt some type of updated monetary system using digital currencies. Many global economists claim that today’s fiat currency system is outmoded and incapable of meeting the needs of future generations who will continue to increase their reliance on digital currencies.
Economists who favor the use of BTC as the world’s reserve currency claim that Bitcoin must enhance its presence in three main categories in order to be viewed by the general public as a legitimate reserve currency. These categories include serving as medium of exchange, a store of value, and a unit of account. 
Let’s briefly review each category.

Medium of Exchange

In order for Bitcoin to be taken seriously as a global reserve currency, it needs to dramatically improve its functionality as a medium of exchange. In other words, BTC must provide businesses and consumers the ability to easily exchange their Bitcoins for goods and services. 
Currently, Bitcoin performs rather poorly as a medium of exchange because there’s no global payment system in place allowing for a seamless transfer of Bitcoins from consumers to merchants. At least for now, the US Dollar serves as a far superior medium of exchange because it’s linked to several different merchant payment systems. 
Of course, the most popular merchant payment systems are Visa, Mastercard, and American Express. Until BTC introduces some type of legitimate merchant payment system, it will never be regarded by the general public, or by traditional financial structures, as an acceptable medium of exchange.

Store of Value

A global reserve currency must be able to preserve its value over a long period of time and also maintain price stability. Although Bitcoin has only been in existence for ten years, it has certainly preserved its store of value. In fact, BTC has increased in value by several thousand percent since it was launched in January 2009. Therefore, Bitcoin easily passes the test as a store of value.
Unfortunately, BTC falls way short in the area of price stability. Since its inception, Bitcoin has been incredibly volatile. In fact, it’s not uncommon for BTC to fluctuate 10% to 15% in a single day. In 2014, BTC lost 62% of its value. Four years later, in 2018, Bitcoin suffered a 78% decline. These types of violent price swings will not be tolerated by the vast majority of consumers. Proponents of Bitcoin must find a way to stabilize the price if they want to promote BTC as a viable replacement for the US Dollar.

Unit of Account

The third category is more of a difficult concept to understand. The technical definition of a unit of account is “a standard numerical unit of measurement used for the purpose of recording the market value of goods and services.” 
For example, all businesses need a reliable unit of account in order to accurately determine and record the value of their assets. A unit of account is especially necessary for companies that maintain large inventories of goods and materials. Bitcoin struggles to be an adequate unit of account because of its price volatility. 
As an example, let’s assume XYZ Widgets Company uses Bitcoin as a unit of account when determining the value of its widget inventory. Due to the volatile nature of Bitcoin’s price, the company’s widget inventory would fluctuate substantially on a daily basis. Therefore, it’s easy to see why BTC wouldn’t serve as a satisfactory unit of account.

The Current Fiat-Based System Will Eventually Disappear

Could Bitcoin eventually become globally accepted as the World’s Reserve Currency? Yes, it could. 
However, until BTC and other digital currencies offer greater price stability, businesses and consumers will most likely continue to prefer using the current fiat money system with the US dollar serving as the World’s Reserve Currency. 
The cryptocurrency community has certainly made an effort to address the issue of price volatility with the introduction of stable coins such as Tether and TrueUSD. However, the stablecoin is still a relatively new concept that must be accepted by mainstream consumers.
There is no doubt that the current fiat-based global currency system will eventually be replaced. It certainly appears that digital currencies have an excellent chance of assuming the leadership role in a new global currency system. 
But it’s highly unlikely that this transition will occur anytime soon. It will take time to educate the global population about the positive aspects of digital currencies like Bitcoin. Ultimately, a new currency system will undoubtedly prevail because it’s impossible to stop the forward progress of technology.               
Full Disclosure: I own BTC on the spot market, BTC futures, and BTC exchange-traded notes.

August 6, 2019
Crypto Industry
Digitex Futures

Is Bitcoin on The Path to Becoming The World’s Reserve Currency?

Dave Reiter
Is Bitcoin on The Path to Becoming The World’s Reserve Currency? 8

When Satoshi Nakamoto mined the Bitcoin genesis block in January 2009, nobody could have predicted that ten years later, the financial community would seriously be discussing the possibility of Bitcoin becoming the world’s reserve currency. Not even the most ardent crypto-bulls would have even imagined that BTC could one day achieve such a coveted status.
But what does it mean to become a reserve currency and what’s the likelihood that Bitcoin will actually replace the US Dollar as the world’s most important monetary unit? Let’s examine the details.
As the name implies, a reserve currency is a unit of account held in large quantities by governments, institutions and global central banks. The world’s reserve currency is the largest holding within each country’s foreign exchange reserves. It separates itself from other currencies based on the fact that it is predominately used in international transactions, international investments and all aspects of the global economy. 
Consequently, the world’s reserve currency must be incredibly stable, universally accepted and attached to a fairly stable government. 

US Dollar Becomes the World’s Reserve Currency

Contrary to popular belief, the US Dollar hasn’t been the world’s reserve currency for hundreds of years. Officially, the US Dollar became the world’s reserve currency in July 1944, during the Bretton Woods Conference. The conference was a gathering of 44 nations with the shared purpose of establishing a new global monetary system to take effect after the conclusion of the war.
The Bretton Woods Conference was a rather lengthy affair, lasting almost the entire month of July 1944. During the final few days of the conference, all participating countries signed the “Bretton Woods Agreement,” which established guidelines and parameters for promoting free trade and capital flows between countries. 
Additionally, each Bretton Woods participant signed a formal accord stating that all countries would link their respective domestic currencies to the US dollar via a fixed exchange rate mechanism. In return, the US dollar would be linked to the price of gold, so that all participating countries could redeem their dollars for gold on demand. 

As a result of this agreement, the US dollar became the de facto World Reserve Currency.       

Financial historians claim that the Bretton Woods Conference was the most successful meeting of the 20th century between multiple countries. Why? Because it created an atmosphere of free trade, transfers of investment capital between countries, economic cooperation, and a stable global currency arrangement. 
For the first time in modern history, nations had a system in place that promoted and encouraged economic prosperity for all participants. 
Unfortunately, the Bretton Woods Agreement slowly began to disintegrate in the 1960s, as the United States dramatically increased the issuance of US dollars as a means of financing the war effort in Vietnam. Furthermore, the US government implemented several domestic social programs in an attempt to stimulate the economy. 
Countries who were holding US Dollars in accordance with the Bretton Woods Agreement began to increase the conversion rate of the dollar to gold. By the early 1970s, the demand for gold had peaked to the level that President Nixon abolished the convertibility of gold for Bretton Woods participants. 
Nixon officially closed the “gold window” on 15 August 1971, essentially bringing the Bretton Woods Agreement to an end after 37 years.

The US Dollar Prevails by Default

Upon the termination of the Bretton Woods Agreement, the global currency system moved to a floating exchange rate system. This system has now been in place continuously for the past five decades. The US dollar still remains the World’s Reserve Currency. In fact, the dollar easily leads all other industrialized nations for daily currency transactions between countries. Additionally, the world’s central banks hold an inordinate value of US dollars as a percentage of their total reserves.
However, during the past few decades, a growing number of international economists, global business executives, foreign leaders, foreign politicians and professional traders within the investment community have called for a new monetary system. Prior to the unveiling of Bitcoin in 2009, the majority of experts were in favor of organizing a “Bretton Woods 2.0 Conference,” for the sole purpose of outlining a new global currency system. 
Although the conference was never held, the prevailing view was that it could establish a new World Reserve Currency, consisting of a basket of currencies from the most economically influential countries. This basket of currencies would be managed by the International Monetary Fund (IMF). The basket would be known as Special Drawing Rights (SDR). 
But, so far, this concept has never come to fruition.

Is Bitcoin Suitable for Becoming the World’s Reserve Currency?        

The introduction of Bitcoin in 2009 has sparked a renewed effort to adopt some type of updated monetary system using digital currencies. Many global economists claim that today’s fiat currency system is outmoded and incapable of meeting the needs of future generations who will continue to increase their reliance on digital currencies.
Economists who favor the use of BTC as the world’s reserve currency claim that Bitcoin must enhance its presence in three main categories in order to be viewed by the general public as a legitimate reserve currency. These categories include serving as medium of exchange, a store of value, and a unit of account. 
Let’s briefly review each category.

Medium of Exchange

In order for Bitcoin to be taken seriously as a global reserve currency, it needs to dramatically improve its functionality as a medium of exchange. In other words, BTC must provide businesses and consumers the ability to easily exchange their Bitcoins for goods and services. 
Currently, Bitcoin performs rather poorly as a medium of exchange because there’s no global payment system in place allowing for a seamless transfer of Bitcoins from consumers to merchants. At least for now, the US Dollar serves as a far superior medium of exchange because it’s linked to several different merchant payment systems. 
Of course, the most popular merchant payment systems are Visa, Mastercard, and American Express. Until BTC introduces some type of legitimate merchant payment system, it will never be regarded by the general public, or by traditional financial structures, as an acceptable medium of exchange.

Store of Value

A global reserve currency must be able to preserve its value over a long period of time and also maintain price stability. Although Bitcoin has only been in existence for ten years, it has certainly preserved its store of value. In fact, BTC has increased in value by several thousand percent since it was launched in January 2009. Therefore, Bitcoin easily passes the test as a store of value.
Unfortunately, BTC falls way short in the area of price stability. Since its inception, Bitcoin has been incredibly volatile. In fact, it’s not uncommon for BTC to fluctuate 10% to 15% in a single day. In 2014, BTC lost 62% of its value. Four years later, in 2018, Bitcoin suffered a 78% decline. These types of violent price swings will not be tolerated by the vast majority of consumers. Proponents of Bitcoin must find a way to stabilize the price if they want to promote BTC as a viable replacement for the US Dollar.

Unit of Account

The third category is more of a difficult concept to understand. The technical definition of a unit of account is “a standard numerical unit of measurement used for the purpose of recording the market value of goods and services.” 
For example, all businesses need a reliable unit of account in order to accurately determine and record the value of their assets. A unit of account is especially necessary for companies that maintain large inventories of goods and materials. Bitcoin struggles to be an adequate unit of account because of its price volatility. 
As an example, let’s assume XYZ Widgets Company uses Bitcoin as a unit of account when determining the value of its widget inventory. Due to the volatile nature of Bitcoin’s price, the company’s widget inventory would fluctuate substantially on a daily basis. Therefore, it’s easy to see why BTC wouldn’t serve as a satisfactory unit of account.

The Current Fiat-Based System Will Eventually Disappear

Could Bitcoin eventually become globally accepted as the World’s Reserve Currency? Yes, it could. 
However, until BTC and other digital currencies offer greater price stability, businesses and consumers will most likely continue to prefer using the current fiat money system with the US dollar serving as the World’s Reserve Currency. 
The cryptocurrency community has certainly made an effort to address the issue of price volatility with the introduction of stable coins such as Tether and TrueUSD. However, the stablecoin is still a relatively new concept that must be accepted by mainstream consumers.
There is no doubt that the current fiat-based global currency system will eventually be replaced. It certainly appears that digital currencies have an excellent chance of assuming the leadership role in a new global currency system. 
But it’s highly unlikely that this transition will occur anytime soon. It will take time to educate the global population about the positive aspects of digital currencies like Bitcoin. Ultimately, a new currency system will undoubtedly prevail because it’s impossible to stop the forward progress of technology.               
Full Disclosure: I own BTC on the spot market, BTC futures, and BTC exchange-traded notes.

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Futures vs. Options - Which Should You Trade? 9

Futures vs. Options – Which Should You Trade?

Digitex Futures
Trading
• Sarah Rothrie
August 5, 2019

Futures and options are both financial derivatives traded by institutions and individuals, either to turn a profit or to hedge against current investments. Some traders like to trade both, while some have a preference for one over the other. When you weigh up your own trading choices between futures vs. options, you must understand the pros and cons of each. 
That’s where we come in. In this guide, we’ll deep-dive into the features of futures and options contracts, take a look at how they originated and how today’s traders across different markets use them. We’ll also compare the opportunities and risks of both stock futures trading and options contracts and examine the current state of the crypto-derivatives markets. 

What is a Futures Contract? 

When you hear the terms “futures” and “futures contract,” they mean one and the same thing. A futures contract is a simple legal agreement between two parties that a particular asset or commodity will be sold at a pre-agreed price on a specific date in the future. 
Futures are one of the oldest forms of derivatives, and their origins offer a simple way of explaining how futures work. Futures emerged as a means of farmers hedging against the future value of their crops. At the start of the growing season, the farmers couldn’t predict whether or not they would have a good or a bad harvest, as it would depend on factors such as the weather.
Similarly, imagine a baker buying the wheat from the farmer on the other side of the transaction – they were subject to the same uncertainty. So, the farmers and the bakers would agree on a price for the harvest at the start of the season.
According to the laws of supply and demand, a good harvest would increase supply, and push down the price of the wheat. Conversely, a poor harvest creates a shortage, driving demand, and wheat prices high. By entering into a futures contract, the farmers and the bakers could hedge their overall risk by agreeing on the harvest price upfront.
Although the markets have evolved, the nature of futures contracts remains the same. Today’s futures markets consist of hedgers and speculators. Hedgers are the parties with commodities or assets to sell who want to secure an agreed price. Speculators are those trade futures contracts against the value of the asset without ever planning to take custody of the asset itself. 
The financial markets are filled with jargon, so you may come across different terms and be left wondering “what are stock futures?” or “what are forex futures?” Rest assured that the explainer given here applies to any futures market, whether the underlying asset is stocks, fiat currencies, cryptocurrencies, or commodities like oil, metals, or utilities. 
So now that you’ve had a futures contract explained, how does an options contract work? 

What is an Options Contract?

A critical difference between futures and options is that an options contract doesn’t represent a legal agreement to buy or sell. An options contract creates a right, not an obligation, to enter into a trade before a fixed date at which the contract expires. 
Options contracts are of two types. A call option is a contract that allows the trader to buy a particular asset at a fixed price, called the strike price before the contract expires. Let’s say someone opens a call option to buy BTC at $10k with an expiry date at the end of 2020.
If BTC goes up to $15k, the trader can buy the BTC at $10k and immediately sell on the open market at $15k, realizing a $5k profit on the transaction. They could also sell the option contract itself, as it already represents a profit. 
The other type of option is a put option, which works in exactly the same way except it represents a sell transaction rather than a buy transaction. 
Like futures contracts, options contracts have a long and rich history, stretching all the way back to Ancient Greece. Aristotle provides a great example of options contracts in action at the time. He wrote of a poor philosopher called Thales, who made his wealth by forecasting the future year’s olive harvest. 
Thales made agreements with the olive press owners for the option to use their olive presses at a fixed value. The next year, there was a bountiful olive harvest. Due to the increased demand for olive presses, Thales was able to sell his “olive press options” for a profit.  

What is the Difference Between Futures and Options?

So, now we’ve covered the difference between futures and options on a mechanical level, what are the differences between future and options in a trading scenario?
Buying options offer a more conservative approach to trading. When buying options, the trader can never lose more than their initial investment, known as the premium. The premium value may vary depending on the difference between the option strike price and the actual asset price and the time left before the option expiry.
Regardless of whether the asset price falls way below the premium, the trader doesn’t lose any more than this value. This applies if they can’t sell the option and choose not to exercise their right to buy. 
The option seller faces far more risk, as they must honor the agreement to sell the options at the strike price. Selling (also called writing) options can lead to very high losses in volatile markets and are best left to the most experienced institutional options traders. 
Futures represent a legally binding agreement to buy an asset; therefore, they carry more risk as the trader cannot simply choose not to fulfill the trade. Furthermore, profits and losses are directly linked to the value of the asset with no premium to offset the downside. 
Conversely, though, trading futures offers the opportunity for far higher returns than trading options. Trading futures on margin amplifies the potential for even bigger profits, and losses, with futures trading. 
Options trading can be more complicated to understand than futures trading. However, once the basics are in place, options represent a solid choice for a newer trader. Because the risk exposure on a call option is limited to the premium paid, a trader can get away with understanding less about the market itself. 
On the other hand, experienced traders who know their markets well tend to opt for futures vs. options. If you’ve spent long enough understanding the markets for a particular asset, then you’re more likely to turn a bigger profit using leveraged futures contracts than with options. 

Markets for Futures and Options

You can trade futures and options across a wide variety of markets. These include:

  • Stocks such as Apple, Google or any publicly-traded company
  • Indices such as the S&P 500 or the DJI
  • Foreign currencies
  • Commodities such as precious metals, oil, and gas, or agricultural products
  • Cryptocurrencies such as Bitcoin or Ether

Trading in these markets can happen both over-the-counter and in exchanges. 
In the traditional financial markets, there is an even broader range of financial derivatives, including forwards and swaps covering a variety of assets. However, in the cryptocurrency space, it’s the futures contract that currently reigns supreme. 

The Burgeoning Crypto-Derivative Market

A vast market for cryptocurrency derivatives has emerged over the last year or two. BitMEX first opened its doors in 2014, but the CME and the Cboe started offering bitcoin futures contracts to institutional clients in December 2017. The primary attraction in trading cryptocurrency derivatives is that the markets are more volatile. This volatility provides the opportunity for traders to realize far more significant gains than in traditional markets, which are more stable. Futures trading also provided the first means of going short on bitcoin. 
At this point in 2019, there are more exchanges to choose from if you want to trade cryptocurrency futures. BitMEX still dominates, but there are plenty of other choices, including Deribit, Bybit, and Cryptofacilities. Many existing cryptocurrency exchanges have expanded into futures too, including OKEx, Huobi and soon, Binance. 
Once Digitex launches, we aim for our zero-commission, decentralized futures exchange to outrank each of them on factors including fees, leverage, security, and liquidity. With the crypto futures markets at an all-time high, there’s no better time than now for new entrants to emerge. 
At the time of writing, the only exchange offering cryptocurrency options is Deribit. This makes the market for options far more limited than futures.  
At Digitex, we firmly believe that futures are the superior choice, particularly for more experienced and regular cryptocurrency traders. They were the first crypto-derivative to emerge, they provide the opportunity for the highest returns, and they have strong institutional and retail support. While the prospects for cryptocurrency options trading remain limited, liquidity will continue to be a challenge. Of course, things could change if more exchanges start offering options. 

Knowledge is Power

So, what about newcomers to the markets, or those who don’t trade so regularly? Well, there are no barriers to entry. However, newcomers to all kinds of trading should take steps to ensure they are educating themselves about the futures trading basics, such as types of instruments on offer and the markets for the underlying assets. 
It will also help to gain an understanding of the principles of technical and fundamental analysis which traders use to read and forecast market fluctuations. Furthermore, all traders, whether newcomers or the most experienced, should have an understanding of their own appetite for risk, and know when to exit a losing trade. 
Following these principles will serve you well, whether you choose to trade spot or derivatives, crypto or stocks, want to make a living trading futures or just trade for fun on the side, or engage in day trading or long term investing. If you want to learn more, the Digitex blog is a great place to start. We’ve published many informational articles which explain futures trading in-depth, covering jargon, strategy, analysis, trading versus investing, and much more. In trading as in life, knowledge is power. 
 
 

August 5, 2019
Digitex Futures
Trading

Futures vs. Options – Which Should You Trade?

Sarah Rothrie
Futures vs. Options - Which Should You Trade? 10

Futures and options are both financial derivatives traded by institutions and individuals, either to turn a profit or to hedge against current investments. Some traders like to trade both, while some have a preference for one over the other. When you weigh up your own trading choices between futures vs. options, you must understand the pros and cons of each. 
That’s where we come in. In this guide, we’ll deep-dive into the features of futures and options contracts, take a look at how they originated and how today’s traders across different markets use them. We’ll also compare the opportunities and risks of both stock futures trading and options contracts and examine the current state of the crypto-derivatives markets. 

What is a Futures Contract? 

When you hear the terms “futures” and “futures contract,” they mean one and the same thing. A futures contract is a simple legal agreement between two parties that a particular asset or commodity will be sold at a pre-agreed price on a specific date in the future. 
Futures are one of the oldest forms of derivatives, and their origins offer a simple way of explaining how futures work. Futures emerged as a means of farmers hedging against the future value of their crops. At the start of the growing season, the farmers couldn’t predict whether or not they would have a good or a bad harvest, as it would depend on factors such as the weather.
Similarly, imagine a baker buying the wheat from the farmer on the other side of the transaction – they were subject to the same uncertainty. So, the farmers and the bakers would agree on a price for the harvest at the start of the season.
According to the laws of supply and demand, a good harvest would increase supply, and push down the price of the wheat. Conversely, a poor harvest creates a shortage, driving demand, and wheat prices high. By entering into a futures contract, the farmers and the bakers could hedge their overall risk by agreeing on the harvest price upfront.
Although the markets have evolved, the nature of futures contracts remains the same. Today’s futures markets consist of hedgers and speculators. Hedgers are the parties with commodities or assets to sell who want to secure an agreed price. Speculators are those trade futures contracts against the value of the asset without ever planning to take custody of the asset itself. 
The financial markets are filled with jargon, so you may come across different terms and be left wondering “what are stock futures?” or “what are forex futures?” Rest assured that the explainer given here applies to any futures market, whether the underlying asset is stocks, fiat currencies, cryptocurrencies, or commodities like oil, metals, or utilities. 
So now that you’ve had a futures contract explained, how does an options contract work? 

What is an Options Contract?

A critical difference between futures and options is that an options contract doesn’t represent a legal agreement to buy or sell. An options contract creates a right, not an obligation, to enter into a trade before a fixed date at which the contract expires. 
Options contracts are of two types. A call option is a contract that allows the trader to buy a particular asset at a fixed price, called the strike price before the contract expires. Let’s say someone opens a call option to buy BTC at $10k with an expiry date at the end of 2020.
If BTC goes up to $15k, the trader can buy the BTC at $10k and immediately sell on the open market at $15k, realizing a $5k profit on the transaction. They could also sell the option contract itself, as it already represents a profit. 
The other type of option is a put option, which works in exactly the same way except it represents a sell transaction rather than a buy transaction. 
Like futures contracts, options contracts have a long and rich history, stretching all the way back to Ancient Greece. Aristotle provides a great example of options contracts in action at the time. He wrote of a poor philosopher called Thales, who made his wealth by forecasting the future year’s olive harvest. 
Thales made agreements with the olive press owners for the option to use their olive presses at a fixed value. The next year, there was a bountiful olive harvest. Due to the increased demand for olive presses, Thales was able to sell his “olive press options” for a profit.  

What is the Difference Between Futures and Options?

So, now we’ve covered the difference between futures and options on a mechanical level, what are the differences between future and options in a trading scenario?
Buying options offer a more conservative approach to trading. When buying options, the trader can never lose more than their initial investment, known as the premium. The premium value may vary depending on the difference between the option strike price and the actual asset price and the time left before the option expiry.
Regardless of whether the asset price falls way below the premium, the trader doesn’t lose any more than this value. This applies if they can’t sell the option and choose not to exercise their right to buy. 
The option seller faces far more risk, as they must honor the agreement to sell the options at the strike price. Selling (also called writing) options can lead to very high losses in volatile markets and are best left to the most experienced institutional options traders. 
Futures represent a legally binding agreement to buy an asset; therefore, they carry more risk as the trader cannot simply choose not to fulfill the trade. Furthermore, profits and losses are directly linked to the value of the asset with no premium to offset the downside. 
Conversely, though, trading futures offers the opportunity for far higher returns than trading options. Trading futures on margin amplifies the potential for even bigger profits, and losses, with futures trading. 
Options trading can be more complicated to understand than futures trading. However, once the basics are in place, options represent a solid choice for a newer trader. Because the risk exposure on a call option is limited to the premium paid, a trader can get away with understanding less about the market itself. 
On the other hand, experienced traders who know their markets well tend to opt for futures vs. options. If you’ve spent long enough understanding the markets for a particular asset, then you’re more likely to turn a bigger profit using leveraged futures contracts than with options. 

Markets for Futures and Options

You can trade futures and options across a wide variety of markets. These include:

  • Stocks such as Apple, Google or any publicly-traded company
  • Indices such as the S&P 500 or the DJI
  • Foreign currencies
  • Commodities such as precious metals, oil, and gas, or agricultural products
  • Cryptocurrencies such as Bitcoin or Ether

Trading in these markets can happen both over-the-counter and in exchanges. 
In the traditional financial markets, there is an even broader range of financial derivatives, including forwards and swaps covering a variety of assets. However, in the cryptocurrency space, it’s the futures contract that currently reigns supreme. 

The Burgeoning Crypto-Derivative Market

A vast market for cryptocurrency derivatives has emerged over the last year or two. BitMEX first opened its doors in 2014, but the CME and the Cboe started offering bitcoin futures contracts to institutional clients in December 2017. The primary attraction in trading cryptocurrency derivatives is that the markets are more volatile. This volatility provides the opportunity for traders to realize far more significant gains than in traditional markets, which are more stable. Futures trading also provided the first means of going short on bitcoin. 
At this point in 2019, there are more exchanges to choose from if you want to trade cryptocurrency futures. BitMEX still dominates, but there are plenty of other choices, including Deribit, Bybit, and Cryptofacilities. Many existing cryptocurrency exchanges have expanded into futures too, including OKEx, Huobi and soon, Binance. 
Once Digitex launches, we aim for our zero-commission, decentralized futures exchange to outrank each of them on factors including fees, leverage, security, and liquidity. With the crypto futures markets at an all-time high, there’s no better time than now for new entrants to emerge. 
At the time of writing, the only exchange offering cryptocurrency options is Deribit. This makes the market for options far more limited than futures.  
At Digitex, we firmly believe that futures are the superior choice, particularly for more experienced and regular cryptocurrency traders. They were the first crypto-derivative to emerge, they provide the opportunity for the highest returns, and they have strong institutional and retail support. While the prospects for cryptocurrency options trading remain limited, liquidity will continue to be a challenge. Of course, things could change if more exchanges start offering options. 

Knowledge is Power

So, what about newcomers to the markets, or those who don’t trade so regularly? Well, there are no barriers to entry. However, newcomers to all kinds of trading should take steps to ensure they are educating themselves about the futures trading basics, such as types of instruments on offer and the markets for the underlying assets. 
It will also help to gain an understanding of the principles of technical and fundamental analysis which traders use to read and forecast market fluctuations. Furthermore, all traders, whether newcomers or the most experienced, should have an understanding of their own appetite for risk, and know when to exit a losing trade. 
Following these principles will serve you well, whether you choose to trade spot or derivatives, crypto or stocks, want to make a living trading futures or just trade for fun on the side, or engage in day trading or long term investing. If you want to learn more, the Digitex blog is a great place to start. We’ve published many informational articles which explain futures trading in-depth, covering jargon, strategy, analysis, trading versus investing, and much more. In trading as in life, knowledge is power. 
 
 

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