Finance 'Ominous signs': A senior economist at an exchange about to launch bitcoin futures thinks a crash could be on the way

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Fluctuating costs of transaction fees appear to play "a major role in determining price corrections," according to the CME Group.

A trader signals an offer in the corn options pit at the CME Group March 15, 2011 in Chicago, Illinois. U.S. stock and commodity prices tumbled today following a sharp drop in Japan’s stock market, as investors worldwide worry about the economic impact of that country's recent earthquake, tsunami and unfolding nuclear crisis. (Photo by ) play

A trader signals an offer in the corn options pit at the CME Group March 15, 2011 in Chicago, Illinois. U.S. stock and commodity prices tumbled today following a sharp drop in Japan’s stock market, as investors worldwide worry about the economic impact of that country's recent earthquake, tsunami and unfolding nuclear crisis. (Photo by )

(Scott Olson/Getty Images)
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  • Fluctuating costs of transaction fees appear to play "a major role in determining price corrections," and there are "ominous signs" that it could drive another bitcoin price crash, according to the CME group.
  • Transaction fees are those paid to bitcoin "miners," and they have risen dramatically as the demand to make high-value transactions has risen and miners prioritise transactions with higher fees.



LONDON — An exchange group which plans to launch Bitcoin futures says there are "ominous signs" that rising transaction costs could cause the volatile cryptocurrency to drop in value.

US-based CME Group will begin offering a trade in bitcoin futures contracts later this month, making it one of two major exchanges which will allow speculators to bet on bitcoin's price moving down as well as up. The move has been taken as a sign of rising interest in bitcoin from institutional investors.

CME Group said on Wednesday that the fluctuating costs of bitcoin transaction fees appear to play "a major role in determining price corrections," and warned that the market might struggle to cope if the fee paid to purchase bitcoin rises much further.

Erik Norland, executive director and senior economist at CME Group, said that transaction costs are showing "ominous signs" that could signal another price correction is imminent.

Norland writes in a research note shared with clients:

"Transaction costs spiked from $2 to around $30 per transaction in late 2010 just before bitcoin prices suffered a 93% collapse. As bitcoin transaction costs subsequently fell, another bull market developed. Transaction costs edged higher in 2012 and then soared to over $80 by early 2013, which coincided with another collapse in bitcoin prices. By 2015, transaction costs eased toward $8 when another bull market began."

Transaction fees are those paid to bitcoin "miners," people who use huge amounts of computer processing power to verify the digital blocks in which transactions using bitcoin are made. Miners are rewarded for their efforts with newly minted bitcoins. But the more bitcoins are "mined," the less the reward, meaning the cost to create a new bitcoin is going up.

Fees are variable, which means users can pay extra to ensure big transactions go through faster. The amount users are paying at the top end has risen dramatically as the demand to make high-value transactions using bitcoins has risen. Miners prioritise transactions with a higher fee.

Prices at the top end now hover around $60 to $70 per transaction, and Norland suggests that the question of whether the market could sustain a higher level is currently unknown.

"With the price of bitcoin now around $10,000 as of this writing, could the market sustain transaction costs of $80, $100 or more without demand and prices collapsing? The answer to this question is not known at the moment, but we will likely find out at some point in 2018 or 2019," he says.