30 Mar, 2018 As bitcoin goes bust, one classic market signal is pointing to more pain
Bitcoin futures have entered into a contango market, suggesting further agony for the cryptocurrency.
A contango market means an asset’s futures contracts are trading at a premium to its spot price; a market watcher could simply look at the daily settlement price data of the underlying futures contract on a given exchange, then examine the price of the series of months further out. If those prices are more expensive, we have a contango.
For instance, bitcoin on the Coinbase exchange was trading near $7,898 on Wednesday, while Cboe bitcoin futures contracts expiring in June were trading at $7,980 per coin.
It is not uncommon see contango markets across other asset classes like grains, metals and energy, and such price action may benefit the hedger who is trying to lock in prices for forward production; in this case, it would be bitcoin miners.
This comes as bitcoin itself has dropped significantly from its highs late last year, wallowing below $8,000 per coin following a meteoric rise in 2017; bitcoin continues declining from its March highs of $11,700, most recently testing support at $7,700. On Thursday, it was at $7,490, according to CoinDesk.
The most recent blow came from an announcement that Twitter would ban cryptocurrency ads. We have seen similar bans by Google and Facebook, as regulatory scrutiny has been another negative catalyst for bitcoin this year.
Looking ahead, we should continue seeing larger bitcoin miners attempt to take advantage of this contango market. Meanwhile, speculators could see a re-test of the all-time futures contract low of $5,970.
Ultimately, I would be cautious until we can see some signs of strength injected back into the market.