The San Francisco Federal Reserve published a paper on Monday that suggests a link between the introduction of Bitcoin futures trading and the cryptocurrency’s price decline from record highs set in December 2017. The paper’s authors assert that Bitcoin’s rapid price increase and subsequent decline are “consistent with trading behavior that typically accompanies the introduction of futures markets for an asset.”
The paper documents Bitcoin’s price rise in 2017, including the rapid acceleration in price during the second half of the year – from just under $4,000 to a peak price of $19,511 on December 17. The authors note that The Chicago Mercantile Exchange launched its future trading on the same day:
“The peak bitcoin price coincided with the day bitcoin futures started trading on the Chicago Mercantile Exchange (CME). In this Economic Letter, we argue that these price dynamics are consistent with the rise and collapse of the home financing market in the 2000s, as explained in Fostel and Geanakoplos (2012). They suggested that the mortgage boom was driven by financial innovations in securitization and groupings of bonds that attracted optimistic investors; the subsequent bust was driven by the creation of instruments that allowed pessimistic investors to bet against the housing market. Similarly, the advent of blockchain introduced a new financial instrument, bitcoin, which optimistic investors bid up, until the launch of bitcoin futures allowed pessimists to enter the market, which contributed to the reversal of the bitcoin price dynamics.”
The authors acknowledge that the Chicago Board Options Exchange (CBOE) had launched its own futures trading market on December 10 – one week prior to CME’s launch – but suggest that overall trading activity was relatively insignificant until CME's future market began operations.