Did Debut of Bitcoin Futures Trigger Crash in Price? - WSJ
New note says the launch of bitcoin futures in December caused the subsequent fall in prices.
3D Render PHOTO: GETTY IMAGES/ISTOCKPHOTO
By Alexander Osipovich
Investors upset that bitcoin has crashed more than 50% since December could now have someone to blame: Chicago futures markets.
That’s the conclusion of a new research note from the Federal Reserve Bank of San Francisco. It finds that the Dec. 17 launch of bitcoin futures at exchange giant CME Group, owner of the venerable Chicago Mercantile Exchange, triggered a collapse in the digital currency by making it easier to “short” bitcoin–or bet on its price falling.
“The rapid run-up and subsequent fall in the price after the introduction of futures does not appear to be a coincidence,” a group of researchers from the San Francisco Fed and the Stanford Graduate School of Business write in the note, released online Monday.
Futures are a tool for betting on whether the price of something–such as gold, pork bellies, or Treasury bonds–will rise or fall. The San Francisco Fed is essentially saying that launching a futures market on an asset that’s never had its own futures market could add downward pressure to the prices of the asset. Until the launch of bitcoin futures, there were few easy ways to short it.
But that’s not how things played out when CME revealed its plan to list bitcoin futures. That announcement, on Oct. 31, was widely seen as a vote of confidence in bitcoin and a huge step forward in its evolution from a niche product favored by hackers and libertarians into a mainstream investing fad.
According to research site CoinDesk, bitcoin more than tripled from $6447.67 on Oct. 31 to its record intraday high of $19,783.21 on Dec. 17–the same day bitcoin futures began trading at CME. Bitcoin was trading at around $9,400 late Monday afternoon.
Bitcoin futures actually started trading on Dec. 10, at CME’s cross-town rival, Cboe Global Markets But the researchers say trading was thin until CME’s launch a week later. They compare the post-Dec. 17 price drop in bitcoin to two other bitcoin price declines in 2017, and they find that the drop after the CME launch was much deeper and longer-lasting.
CME disputed the idea that its futures caused the bitcoin crash. “Many factors influence price, and it is worth noting that the futures market is still trading a fraction of the cash bitcoin market each day,” a CME spokeswoman said.
That isn’t the first time the introduction of a derivative contract has been blamed for a big price drop. In a 2012 paper, a pair of economists at George Washington University and Yale University argued that the 2005-06 introduction of credit default swaps, or CDS, on certain mortgage-backed securities eventually caused a drastic drop in the price of those securities. That’s because the CDS allowed bearish traders to express their view on an overvalued market, as anyone who has watched “The Big Short” can attest.
Something similar happened with bitcoin, according to the San Francisco Fed’s note. “Once derivatives markets become sufficiently deep,” it says, “short-selling pressure from pessimists leads to a sharp decline in value.”