Intro to Bitcoin Futures in CME, and its effect to bitcoin price
Bitcoin futures opened for trading on the CBOE Futures Exchange on December 10, 2017.
CME Group, the world’s leading and most diverse derivatives marketplace, had announced its intent to launch bitcoin futures in the fourth quarter of 2017 on October 31, 2017,
Introduction to CME CF Bitcoin Reference Rate(BRR):
CME CF Bitcoin Reference Rate (BRR) is a standardized reference rate. CME CF Crypto Currencies Indices have been generating BRR and BRTI rates since November 2016 with several bitcoin exchanges and trading platforms providing pricing data, including Bitstamp, Coinbase, itBit & Kraken.
- Resources: Bitstamp, Coinbase, itBit & Kraken.
- Compare to: CME CF Bitcoin Real-Time Index (BRTI) is a standardized spot price index.
Issuance of bitcoin futures will affect the price in the bitcoin market:
Claimed by the research from Federal Reserve Bank of San Francisco, they suggested that the rapid rise of the price of bitcoin and its decline following the issuance of futures on the CME.
From the Supply & Demand Analysis
Pessimists: With the introduction of bitcoin futures, pessimists could bet on a bitcoin price decline.
So they decided to buy and sell contracts with a lower delivery price in the future than the spot price.
For example, they could sell a promise to deliver a bitcoin in a month’s time at a lower price than the current spot price and hope to buy a bitcoin during the month at an even lower price to make a profit.
With offers of future bitcoin deliveries at a lower price coming through, the order flow necessarily put downward pressure on the spot price as well.
For all investors who were in the market to buy bitcoins for either transactional or speculative reasons and were willing to wait a month, this was a good deal.
The new investment opportunity led to a fall in demand in the spot bitcoin market and therefore a drop in price.
With falling prices, pessimists started to make money on their bets, fueling further short selling and further downward pressure on prices.
Optimists: Optimists bid up to the price before financial instruments are available to short the market (Fostel and Geanakoplos 2012).
Once derivatives markets become sufficiently deep, short-selling pressure from pessimists leads to a sharp decline in value.
While we understand some of the factors that play a role in determining the long-run price of bitcoin, our understanding of the transactional benefits of bitcoin is too imprecise to quantify this long-run price.
But as speculative dynamics disappear from the bitcoin market, the transactional benefits are likely to be the factor that will drive valuation.
Conclusion: It was consistent with pricing dynamics suggested elsewhere in financial theory and with previously observed trading behavior.
Reference:
Investopedia
G Hale, A Krishnamurthy, M Kudlyak, P Shultz — FRBSF Economic Letter, 2018 “How futures trading changed bitcoin prices”
Published at Sat, 17 Aug 2019 13:27:00 +0000
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