The San Francisco Federal Reserve released a study showing that the sharp fall in Bitcoin’s price from nearly $20,000 in December was influenced by the launch of Bitcoin futures markets.
According to a study published Monday, the authors — including three researchers from the Federal Reserve Bank of San Francisco and a finance professor from Stanford University — conclude that Bitcoin’s drop from about $20,000 in December 2017 to roughly $6,000 in early February was affected by the introduction of Bitcoin futures.
Based on the researchers’ calculations and data, the rapid rise in Bitcoin’s price and its subsequent decline after the Chicago Mercantile Exchange (CME) began offering futures is consistent with price dynamics proposed elsewhere in financial theory.
The price dynamics the researchers describe refer to a pattern in which demand for a financial instrument is initially driven by optimists, pushing the price up until a tipping point is reached; thereafter, pessimists gain the upper hand and the market moves in the opposite direction.
The researchers noted (translated):
The rapid price increase and subsequent decline following the introduction of futures does not appear to be coincidental. It matches the trading behavior typically associated with the launch of futures markets for an asset.
Bitcoin’s peak price occurred on December 17, the day the CME introduced Bitcoin futures trading.
Before the introduction of futures, pessimistic traders lacked a straightforward financial mechanism to express or profit from the belief that Bitcoin’s price would fall. The study explains that Bitcoin futures provided such traders with a tool to bet on a decline by selling contracts at prices below the spot market. For instance, a trader could sell a contract — effectively a promise to deliver one Bitcoin in a month at a lower price than the current spot price — with the expectation of buying Bitcoin later at an even lower price and earning a profit.
The San Francisco Fed researchers observed (translated):
The availability of future contracts priced below the spot market put pressure on both order flow and the spot price.
The researchers compared this price response to that seen in mortgage-backed securities, where similar dynamics between optimistic and pessimistic traders can drive significant moves. Once futures trading triggered a downward trend, the spot market followed: order flow declined and the spot price fell sharply.
That a connection exists between the December crash and the launch of Bitcoin futures is not new to the cryptocurrency community. As previously reported, the chart shows at least a temporal correlation between these events.
The San Francisco Fed’s study is not the only analysis of Bitcoin’s dramatic fall from nearly $20,000 to around $6,000. In March, Chainalysis published a study concluding the crash was driven mainly by two factors. First, regulatory news materially affected trading volume. Second, a lack of solid fundamentals or indicators contributed to herd behavior, which spread across exchanges and cryptocurrencies.
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