Did Futures Trading Change Bitcoin Prices?

December 24, 2018

A summary of bitcoins ups and downs in a report by econmists Galina Hale, Arvind Krishnamurthy, Marianna Kudlyak and Patrick Shultz discussing cryptocurrencies in their latest speculative rage where traders in 2017 pushed bitcoin from approx. $1000 to almost $20,000 in a matter of months. But after hitting fresh highs, bitcoin’s price reversed and plummeted in 2018, a trending pattern seen in previous years with highs and lows, economists parallel this volatility to bitcoin futures trading that began in December 2017. 

In 2009, financial and technology innovation introduced the world to bitcoin, a digital currency created on the foundation of the distributed ledger known as blockchain.  In 2017, bitcoin’s price rocketed to $19,511. The pricing subsequently receded through to the end of 2018 with bitcoin’s value falling to less than $3000, alarming the entire crypto industry. While Bitcoin’s decline coincided with the Chicago Mercantile Exchange’s opening of a futures market for bitcoin, which enabled bearish traders to take short positions, we are left wondering how institutions play a role as the price drop emulates patterns seen with the release of derivatives in other asset markets, such as those for mortgage-backed securities. Experts say that the rapid run-up and subsequent fall in price after the introduction of futures does not appear to be a coincidence. With the opening of CME futures trading for bitcoin, bearish traders could finally take short positions on the digital currency, and their success triggered even more pessimism, which created a downward price spiral.  As speculative dynamics disappear from the bitcoin market, the transactional benefits are likely to be the factor that will drive valuation. Investors will ultimately determine bitcoin’s worth by analyzing fundamentals that include “transactional demand,” mining costs, regulatory governance and the use of rival cryptocurrencies.