David R. Henderson  

Futures Trading Brought Down Bitcoin Price

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File under: Why didn't I think of that?

From Bitcoin's inception in 2009 through mid-2017, its price remained under $4,000. In the second half of 2017, it climbed dramatically to nearly $20,000, but descended rapidly starting in mid-December. 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.

This is from Galina Hale, Arvind Krishnamurthy, Marianna Kudlyak, and Patrick Shultz, "How Futures Trading Changed Bitcoin Prices," FRBSF Economic Letter, May 7, 2018.


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.

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COMMENTS (7 to date)
Henk van Arkel writes:

This makes total sense to me. But what puzzles me is how the 2nd phase will develop. Can we expect parralels again or is it a roulette game?

Bob Murphy writes:


I didn't think of that either; I was thinking the futures market would (if anything) help stabilize prices.

You could make a pitch to this guy and ask only 1 percent of the fees.

David R Henderson writes:

@Bob Murphy,
Thanks. I would bet that it will stabilize bitcoin prices but at a lower level.
Re Bill Gates, LOL. Thanks.

MikeP writes:

There is no shortage of Congresspersons who know how to fix this persistent problem of speculators squelching market valuations.

Alan Goldhammer writes:

How do you know that it was not "Bubble" recognition? I think this is a more probable choice.

David R Henderson writes:

@Alan Goldhammer,
How do you know that it was not "Bubble" recognition? I think this is a more probable choice.
It almost certainly does reflect the view of many people that the bitcoin price was a bubble. That's a big part of the authors' point. Once you recognize that, how do you bet against the bitcoin? You can't. The most you can do is refrain from buying. Only when there's a futures market can you actively bet against it.

Alan Goldhammer writes:

@David Henderson - of course! Senior moment, that was the whole predicate of 'The Big Short' with the mortgage stuff over a decade ago.


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