San Francisco Fed Says BTC-based Future Markets Played a Role in Price

The U.S. Federal Reserve system has been very interested in bitcoin lately and has released a bunch of reports from Federal Reserve leaders and researchers from different offices. This past Monday, the Federal Reserve Bank of San Francisco and a professor from Stanford University published a paper that concludes that bitcoin-based futures markets affected the cryptocurrency’s price patterns since Cboe and CME launched the products.

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Study Concludes That BTC Futures Markets May Have Helped Push the Cryptocurrency’s Price Down

Have you ever wondered why BTC markets dipped in value over the past four months of 2018? Well, researchers from Stanford University and the Federal Reserve Bank of San Francisco believe bitcoin future markets played a role in BTC’s market behavior. The study was published under the central bank’s economic research reports website and written by Galina Hale, Arvind Krishnamurthy, Marianna Kudlyak, and Patrick Shultz. The Fed researchers say that the bitcoin derivatives markets introduced this past December suggests a correlation with the decline in the cryptocurrency’s value just like many other markets affected by futures products in the past.

The paper states that throughout BTC’s inception the value of the coin remained under $4,000 but climbed “dramatically to nearly $20,000, but descended rapidly starting in mid-December,” explains the Fed’s economic study. The researchers go on to state:          

The peak price coincided with the introduction of bitcoin futures trading on the Chicago Mercantile Exchange. The rapid run-up and subsequent fall in the price after the introduction of futures does not appear to be a coincidence. Rather, it is consistent with trading behavior that typically accompanies the introduction of futures markets for an asset.

The researchers’ comparison of three largest bitcoin price declines in 2017. Source: Bloomberg, central bank report authors’ calculations.

Short-Selling Pressure from Pessimists Leads to a Sharp Decline in Value

The price decline following the issuance of bitcoin futures on the CME is “clearly larger” than in the previous two reversals says the report. “Additionally, the two earlier decreases in prices returned to pre-crash levels in about a month — As of late April, the bitcoin price had not returned to its pre-futures peak,” explains the San Francisco Federal Reserve report. The paper emphasizes why this was the case by saying:  

We suggest 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 — Once derivatives markets become sufficiently deep, short-selling pressure from pessimists leads to a sharp decline in value.

The researchers also note that they understand there are other fundamental factors tethered to the overall value of the cryptocurrency and “transactional benefits” will likely quantify the currency’s long-term price. “As speculative dynamics disappear from the bitcoin market, the transactional benefits are likely to be the factor that will drive valuation,” the paper concludes.

What do you think about the Federal Reserve Bank of San Francisco’s study about bitcoin futures markets affecting the price of BTC? Let us know in the comments below.  

Images via Pixabay, and the San Francisco Federal Reserve.  

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