Bitcoin Futures

The price of Bitcoin has been very volatile lately, going up and down more than ten percent in the space of hours.

The reason for this is that Bitcoin is a technology with very limited value. It can be used as a way to escape government meddling in the economy. However, it will never be used as a currency in everyday transactions. Its current price is therefore pretty much detached from its true value. Gross miss-pricing results in volatility since there is nothing supporting the price but hype and hope.

Also, there is nothing physical involved, so there is no way to accurately judge if the price is roughly in line with its value. With gold and real estate, it's far easier to know whether the price is way out of wack or not. An ordinary house should not take a lifetime to afford on a regular salary. A gold ring should not take a year of earnings. A Bitcoin... well... its a number. Who knows what it should be worth?

However, Bitcoin has nevertheless become a commodity of sorts, and there will be futures traded in it starting this coming Monday.

The hope is that this will smooth out the price fluctuations and set Bitcoin on course to become a regular commodity like oranges, copper, pork bellies or gold.

My feeling is that price fluctuations will in fact be smoothed out quite significantly by the futures contracts. However, if futures contracts do indeed help as a price discovery mechanism, it will soon become clear that Bitcoin does not deserve the price it is currently trading at.

Prices will quickly go down to a little above production cost, where it will trade for a while before continuing down to zero.

Bitcoin is not a commodity. To treat it that way is silly. The futures traded will be a short lived adventure.