[2018-05-07] Futures Launch Weighed on Bitcoin's Price, Say Fed Researchers

[Terraformer]

Researchers from the U.S. Federal Reserve Bank's San Francisco division believe that the launch of bitcoin futures on several marketplaces in the U.S. last December played a role in a subsequent slump in the cryptocurrency's price.

According to a research paper published on Monday, the authors  - including three researchers from the Federal Reserve Bank of San Francisco as well as a finance professor from Stanford University - believe bitcoin's recent price trend is somewhat similar to how the housing bubble developed in the U.S. during the 2000s.

And the introduction of bitcoin-related derivatives played a part in that trend, the authors wrote.

As previously reported by CoinDesk, the Cboe and CME Group moved their bitcoin futures products to the market near the end of the year after obtaining approval from the Commodity Futures Trading Commission (CFTC). It was around this time that the price of bitcoin nearly hit $20,000 after surging throughout that year, only to fall close to $6,000 by the end of the first week of February.

Citing data and calculations conducted through their research, the Fed paper's authors argue that the "rapid rise of the price of bitcoin and its decline following [the] issuance of futures on the CME is consistent with pricing dynamics suggested elsewhere in financial theory."

Such pricing dynamics, as the researchers explained, refer to a trend where demand for a financial instrument is initially driven by optimists who push up the price until the point where the market introduces a mechanism that allows pessimists to invest reversely.

The researchers argued:

"And until December 17, those investors [optimists] were right: As with a self-fulfilling prophecy, optimists' demand pushed the price of bitcoin up, energizing more people to join in and keep pushing up the price. The pessimists, however, had no mechanism available to put money behind their belief that the bitcoin price would collapse. So they were left to wait for their 'I told you so' moment."

That said, such trends may not continue indefinitely, as the authors further suggested.

As the bitcoin mining process goes on and fewer coins become available (as a result of the scheduled halving of the network subsidy, now pegged at 12.5 BTC per block), the authors argue that the transactional function of bitcoin as a payment method could play a leading role in driving its value as "speculative dynamics disappear."

Read the full Fed paper >> https://www.coindesk.com/federal-reserve-scholars-blame-bitcoins-price-slump-to-the-futures/

[Samarkand]

I disagree with the conclusion of the Fed researchers.
The trading volume on both CME and CBOE was completely negligible compared
to the actual trading volume on the major Bitcoin exchanges in the first months
after their introduction. Therefore not many major players seem to have jumped
at the opportunity of finally being able to short BTC.

To me this looks like an exemplary research paper where the authors
come up with a well-sounding explanation for an event after the fact that may
sound true, but is just one among many possible explanations.

It is more likely that the bullrun simply stopped, because the number of
possible new investors for the current hype cycle got too small. Additionally,
Tether issuances that drove the price action have basically stopped since the end
of the year.

There are many explanations that are way more plausible than the theory of the
Fed researchers.

[1Referee]

Bitcoin's price increased solely based on the speculation of these futures. If there were no futures, there wouldn't be a near $20,000 peak, period.

CME was the last to enter, and as main player in their own field the market kept pushing further up, and at the moment it went live, and thus the speculative hype came to an end, it was done and over. If you also add that the $20,000 level is a very important psychological barrier, it was even more obvious that we wouldn't make it past that level. If you also take into consideration the potential tax sales after such a massive increase, how obvious do people want it to be before they realize it?

This is a market where the price increases in advance of the event or happening, and these future markets once again pointed that out. If you sold near these levels, you have done a perfect job. The only ever times I had a 'short the f*ck out of this shit' moment was back in 2013 and last year.