One of the reasons that long-only investors have succeeded in the Bitcoin market is that there is no effective way to short large amounts of Bitcoin. All that could change in a month's time if CME launches its Bitcoin futures.

CME's Bitcoin futures

CME's announcement that it would launch Bitcoin futures in December 2017 provided a boost to Bitcoin's price. The expectation is that Bitcoin futures would lend legitimacy to the asset class and you could see institutional investors entering the Bitcoin market. If Bitcoin futures were approved by the CTFC, then it would also be difficult for the SEC to block Bitcoin ETFs as the underlying would be a regulated asset.

However, Bitcoin investors might be missing the point. The launch of Bitcoin futures would provide bears with a means to short large quantities of Bitcoin; something which they cannot effectively do today. Speaking to CNBC, Terry Duffy, the Chairman and CEO of CME said:

Today you cannot short Bitcoin. So there's only one way it can go. You either buy it or sell it to somebody else. So you create a two-sided market, I think it's always much more efficient.

Margin trading at exchanges

While technically one can short Bitcoin today through margin trading at existing exchanges, the liquidity and volumes at these exchanges are not sufficient for large investors. Exchanges such as Bitfinex allow users to borrow digital tokens and sell them, subject to other users agreeing to lend the assets to the margin trader.

However, such exchanges are few and far between and most exchanges allow only regular buying and selling, which favours traditional long-only investors. Also, many exchanges, such as Bitfinex, don’t allow US citizens to margin trade on their platform. Regulated futures create a whole new narrative, since these trades are cash-settled and short sellers do not have to actually borrow Bitcoins.

Bears beware

Bitcoin futures may provide Bitcoin sceptics with a way to short Bitcoin, but that does not mean that it would be a successful trade strategy. Given Bitcoin's wide volatility and penchant for sudden bull runs, futures could easily turn into a bear trap instead of providing bears with teeth. Even Jamie Dimon, who has attacked Bitcoin as a fraud and a bubble, has said that he wouldn't short Bitcoin. In an interview in CNBC in September 2017, Dimon said:

I am not saying go short. Bitcoin could go touch $100,000 before it goes down. So this is not (what you) advise somebody to do.

Bears beware - if there is one thing which is tougher than identifying a bubble, it is identifying when a bubble will burst.