The Problem
Enemies with unlimited cash (The Federal Reserve Board or the International Monetary Fund, for example), can suppress the price of bitcoin; here, I demonstrate why their suppression can have only temporary effects. Exactly what price suppression can achieve, long term, is debatable and not the topic of this article. I will just explain how price suppression can be achieved in the short term, and why the strategy won’t work in the long term.
Futures Markets
Price manipulation can be accomplished through the cash-settled futures market. Here’s how: Imagine you have 1 bitcoin and wish to bet on its future price. Suppose the spot price is currently $50,000. You write a contract that in one year (you can choose other time periods, but let’s go with one year for simplicity), you will sell 1 bitcoin at $50,000 (you can actually set any price).
How much is this contract worth? Well, first consider what are the advantages to the person who buys the contract:
- They can refrain from parting with $50,000 now, and instead wait one year before they pay for the 1 bitcoin – so they get to hold $50,000 in cash for one year, and holding that extra cash has some value because it can earn yield.
- They still get exposure to the price movements of bitcoin without paying for it in full, because no matter what happens to the price of bitcoin in one year, they effectively have to buy it for $50,000 at that time. If the price goes up to say $70,000, they have to buy the bitcoin for $50,000, and can sell it immediately for 70,000 and make $20,000 profit, or they can just hold on to the bitcoin that they got cheaply. But if the price falls, they still need to pay
