The introduction of Bitcoin futures in December last year, which gave investors the opportunity to bet against the value of Bitcoin, played a major role in the fall in prices in late 2017 and early 2018, according to the US Federal Reserve.
Bitcoins Connection to the futures markets
In the Federal Reserve Bank of San Francisco Business Letter published today, May 7, the authors conclude that Bitcoin’s rapid startup and subsequent fall in prices following the introduction of futures was no coincidence. Rather, it is in line with the trading behaviour typically associated with the introduction of futures markets for an asset – a situation comparable to the securitisation of bonds in the early 2000s.
“THE FOLLOWING BUST WAS DRIVEN BY THE CREATION OF INSTRUMENTS THAT ALLOWED PESSIMISTIC INVESTORS TO BET AGAINST THE HOUSING MARKET,” WROTE THE FEDERAL RESERVE. “THE EMERGENCE OF THE BLOCKCHAIN ALSO INTRODUCED A NEW FINANCIAL INSTRUMENT, BITCOIN, OFFERED BY OPTIMISTIC INVESTORS UNTIL THE INTRODUCTION OF BITCOIN FUTURES PESSIMISTS ENABLED MARKET ENTRY, WHICH CONTRIBUTED TO THE REVERSAL OF BITCOIN PRICE DYNAMICS.
Federal banking politicians have, especially in recent months, rejected bitcoin as an alternative currency to the dollar or other funds supported by the central bank. San Francisco Fed President John Williams, who will move to New York next month to head the Fed, was particularly critical.
CME Group & Cboe Global Markets
On 17 December, CME Group Inc. went public as the second stock exchange after Cboe Global Markets Inc. This date coincided with Bitcoin’s all-time high (ATH), which was then traded at around $20,000. The report’s authors, Galina Hale, Arvind Krishnamurthy, Marianna Kudlyak and Patrick Shultz, said that the introduction of futures has ended’unilateral speculative demand’.
One step at a time
The Federal Reserve argues that the use of Bitcoin as a boundless medium of exchange – which they call “transactional benefits” – will be the biggest factor in determining the price:
“WHILE WE UNDERSTAND SOME OF THE FACTORS THAT PLAY A ROLE IN DETERMINING THE LONG-TERM PRICE OF BITCOIN, OUR UNDERSTANDING OF THE TRANSACTIONAL ADVANTAGES OF BITCOIN IS TOO IMPRECISE TO QUANTIFY THAT LONG-TERM PRICE. BUT AS SPECULATIVE DYNAMICS ARE DISAPPEARING FROM THE BITCOIN MARKET, THE TRANSACTIONAL BENEFITS ARE LIKELY TO BE THE FACTOR THAT WILL DRIVE VALUATION FORWARD.”