San Francisco Fed: Bitcoin Futures Led to Price Decline

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San Francisco Fed: Bitcoin Futures Led to Price Decline

The San Francisco Federal Reserve released a report on May 7, 2018, as part of their Economic Letter detailing the impact that the launch of the Bitcoin futures market had on the price of bitcoin. Researchers at the SF Fed carried out a detailed study on the rise and fall of bitcoin prices in 2017. Their overall conclusion is that the emergence of futures caused the decline in the prices of bitcoin.

Not a Coincidence: Futures Launch and Price Decline

The proximity between the launch of the futures market and the sharp rise and fall of the pioneer cryptocurrency in late 2017 was no coincidence, says the report. Reiterating the fact, the four researchers responsible for the study wrote that:

“The rapid run-up and subsequent fall in the price after the introduction of futures does not appear to be a coincidence.”

Bitcoin rose to its peak of $19,783 on December 17, 2017, the same day the CME introduced its bitcoin futures trading. Researchers believe that there exists a chain of causality between the two events that can be proven beyond reasonable doubt by looking at the evidence on offer.

The report also bases its conclusions on the fact that bitcoin behaved like other assets when a futures trading market was introduced.

The arrival of futures contracts meant that for the first time since the inception of the market, people could comfortably bet on the decline of bitcoin prices.

While futures trading might have been recorded as an increase in trading volume bottom-line, they had the opposite effect on the value of bitcoin.

The effect of pessimistic trading instruments seemed to be even more profound in the case of bitcoin, given the unprecedented volatility of the market. Futures trading enabled the introduction of purchase and sales contracts at lower delivery prices than the current price at the time the trade was initiated.

As the volume of such “negative” trades increased, downward pressure was being exerted on the price of bitcoin. Thus, Bitcoin futures began to cause a drop in the spot price, and once this happened, the bears had further incentive to fuel short selling which forced prices even lower.

Gradual Decline vs. Instant Collapse

The Fed report addressed what would potentially have been a glaring issue in its analysis if left unexplained. If the premise is accurate and futures caused bitcoin prices to drop then why was it a gradual decline and not an instant collapse?

To answer this question, the report explains that the Cboe bitcoin futures trading began a week earlier than that of the CME. However, trading was thin as there seemed to be a general reluctance to enter the market at inception. This reticence did eventually give way to more active futures trading within a few short weeks.

NYSE Parent to Adopt Bitcoin

There have been reports that more institutional finance players are looking to enter the bitcoin market. Even on Wall Street, where the default narrative has always been that bitcoin is unregulated, things are beginning to change. Goldman Sachs recently announced that it would soon open a Bitcoin trading platform, becoming the first Wall Street bank to do so.

Intercontinental Exchange (ICE), the parent company of the New York Stock Exchange (NYSE) has also announced on May 7, 2018, that it too is planning to launch a Bitcoin trading service.

With all of these mainstream financial behemoths coming into the market, some crypto purists are worried that cryptocurrency is being taken away from its libertarian roots. According to them, the pioneers of the system wanted to create a financial ecosystem that could do away with banks in favor of a direct relationship between the two participants of a transaction.

Priyeshu Garg

Priyeshu is a software engineer who is passionate about machine learning and blockchain technology. He holds an engineering degree in Computer Science Engineering and is a passionate economist. He built his first digital marketing startup when he was a teenager, and worked with multiple Fortune 500 companies along with smaller firms. When he is not solving the transportation problems at his company, he can be found writing about the blockchain or hacking at a Hackathon.

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