
How Futures Trading Changed Bitcoin Prices - Spellman
https://www.frbsf.org/economic-research/publications/economic-letter/2018/may/how-futures-trading-changed-bitcoin-prices/
======
dkrich
I'd offer a much simpler explanation. The buzz around Bitcoin reached a
critical mass where people at home with no knowledge of cryptocurrencies or
blockchain technology suddenly got caught up in a bubble. As the interest
increased so did the price so it became a feedback loop.

People saw their friends and coworkers talking about huge gains and wanted to
get in on it. Coinbase allowed anyone with a smartphone and a checking account
to buy Bitcoin which further drove up the price. Meanwhile the supply was only
going up incrementally. So you had a huge swell in demand and no corresponding
increase in supply. This resulted in the price increase.

Then when the supply of buyers slowed down there were more sellers than buyers
and the price dropped. This is the most classic form of a bubble and I'm
surprised that people are looking for alternate explanations, like the
introduction of futures, which I find absurd. If it were so easy to predict a
crash simply because you now had a vehicle to short it, everyone would have
done so. There are ways to short most securities that are traded and yet not
all securities collapse in value. The author cites two examples of extreme
bubbles- the subprime mortgage market and Bitcoin in late 2017- and blames the
crashes on the creation of vehicles to short them. In reality the mortgage
market didn't crash until people started defaulting on debt en masse and the
vehicles to short the mortgages existed a long time before the market crashed.

~~~
gst
> I'd offer a much simpler explanation. The buzz around Bitcoin reached a
> critical mass where people at home with no knowledge of cryptocurrencies or
> blockchain technology suddenly got caught up in a bubble. As the interest
> increased so did the price so it became a feedback loop.

Yes. Those bubbles happen regularly in the Bitcoin world. Maybe the futures
had some impact, but even without futures a bubble will eventually end in a
crash.

December was crazy. I had several non-tech friends ask me how to buy Bitcoins.
I strongly recommended against buying, but at least one of them still used a
leveraged trade on some sketchy platform to buy. Needless to say that it
didn't take long until the volatility wiped out 100% of his investment. I'm
against regulation but seeing first hand how financially illiterate people
behave I'm not opposed to a minimum level of regulation - e.g., why do retail
investors need access to leveraged trading?

~~~
lend000
Non-accredited investors don't legally have access to leveraged trading in the
US -- many were using it illegally and/or violating ToS of various exchanges.
But overall, leverage was not what caused the bubble or the majority of the
losses. The fact of the matter is that trading is mostly a zero sum game, and
your typical emotional, uneducated retail 'investor' doesn't stand much chance
of scalping a substantial profit from people and organizations who are either
A. long term investors that bought very cheap and unloaded during huge rallies
and more so B. professional traders that provide liquidity for the market and
make extra money when retail emotion and high volume increase volatility.

You could ban casinos, the lottery system, as well as a number of economically
necessities such as credit cards, publicly traded market systems, etc., and
you STILL would be unable to protect some people from their own poor financial
decisions.

So I say, as long as fraud in these markets is punished and disincentivized,
there isn't much more to be done.

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tristanho
This seems like it may be a victim of the narrative fallacy, trying to make
this one simple narrative explain the results of a complex system (the bitcoin
market).

Everyone has a pet theory as to why bitcoin crashed: regulation, "whales"
selling large volumes at once, institutional investors, Futures trading, etc.

What's the real reason? It's probably a combination, and almost certainly more
complicated that solely "bitcoin futures."

~~~
kmitz
I totally agree. Current pattern is very similar to the four-five previous
bubbles, which the author doesn't seem to take into consideration or even be
aware of.

Besides, futures trading has existed a long time on chinese platforms before
CME and CBOE joined the party.

It really is a waste of time to speculate why bitcoin price is going up or
down on such timescale.

~~~
gst
Also Bitcoin has been declared dead 299 times already:
[https://99bitcoins.com/obituary-stats/](https://99bitcoins.com/obituary-
stats/)

Maybe the futures will have some impact, but I wouldn't be surprised if in
hindsight it will turn out that futures didn't have any impact at all.

------
craigc
I don’t know why people are still surprised by this. There are a _lot_ of
people in powerful places that want Bitcoin to fail and die. Futures markets
introduced a regulated way for them to make that happen.

Buy up a ton of Bitcoin during the lead up to futures trading, then short
Bitcoin on the futures market while market selling thousands of the cheaply
acquired Bitcoin on spot exchanges. You succeed in lowering the price of
Bitcoin, killing the public’s perception of crypto currencies, scaring away
retail investors, and you make a killing in the process.

JPMorgan has been using futures markets to manipulate Gold and Silver spot
prices for years while also accumulating huge amounts.

Look at an early article that was published prior to the launch:

[https://www.coindesk.com/cme-groups-leo-melamed-well-tame-
bi...](https://www.coindesk.com/cme-groups-leo-melamed-well-tame-bitcoin/)

It was all planned ahead of time for Wall Street to get maximum profit at the
expense of regular people. What else is new.

~~~
earthtolazlo
It’s a good thing that Bitcoin’s inherent scalability and utility as a
currency makes it resistant to such manipulation.

~~~
EthanHeilman
Can't tell if sarcastic or not

~~~
nmca
Clue: it is sarcastic.

------
cateye
>> the mining cost of bitcoin should not affect its value any more than the
cost of printing regular currency...

This is a frequently made logic mistake. Proof of work determines the value of
the currency strongly because it is inherently interconnected with the
sustainability of the underlying network operation. That is why it is often
explained as "the ledger is the currency".

Mining is not only for creating new coins but also for validating transactions
and propagating of the ledger.

Therefore cryptocurrency is a different paradigm where direct comparisons are
not always possible and result in wrong conclusions.

~~~
Ihfhcub
Sorry but the complete opposite of everything you say is true.

Hashrate follows price only. Very rarely will the hashrate effect price

Miners have no say in what is a valid transaction. Mining system had only one
purpose. To make sure miners have no say on what is a valid transaction

Miners have no control over how new coins are made. They disempower themselves
by competing for the protocol dictacted reward

~~~
cateye
Don't want to go in a discussion and maybe you are completely right, but to my
understanding:

Miners collect the transactions on the network into large bundles called
blocks. These blocks are strung together into one continuous, authoritative
record called the block chain.

Miners create blocks of transactions, and they have to create them in such a
way that the rest of the network will accept them. One of the requirements is
that the transactions in the block are all valid transactions. So yes, miners
will validate transactions before they add the transaction to a block. If the
miner cheats, and puts an invalid transaction into a block, then the rest of
the network will reject that block, and the miner would have wasted their time
doing the proof of work on that block.

[https://bitcoin.stackexchange.com/questions/148/what-
exactly...](https://bitcoin.stackexchange.com/questions/148/what-exactly-is-
mining)

~~~
Ihfhcub
Yes you're right. But people's first analysis is to give too much weight to
miners

The protocol decides what is a valid transaction and the users enforce it.

If miners decide what is valid the price of bitcoin goes to zero. They are a
slaves to the protocol and that is the only reason that the mining mechanism
works. Miners disempower themselves by competing

------
pyrrhotech
Fake news, both CME and CBOE Bitcoin futures have very anemic volume. It is
mere coincidence than the bubble popped shortly after the debut.

~~~
csomar
I’m not sure why you are getting downvoted. The OP is not providing any proof
whatsoever of the CME futures influence.

Yes their volume is tiny compared to the unregualted market I can hardly think
it’ll have any effects.

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JumpCrisscross
Anecdote: the bozo content of the securities market went down after crypto.
Particular in private equity and venture capital. The segregation of low-
information traders in the crypto space may have made other markets more
reliable.

------
lordnacho
Well it might be correct in this case, but I'm not sold on there being a
general connection between stuff getting shortable and the price going down.
There's only one example given, and the mortgage market is not a great
comparison since it didn't suddenly get its own futures. And there were plenty
of ways for institutions to bet against mortgages OTC.

~~~
chollida1
> Well it might be correct in this case, but I'm not sold on there being a
> general connection between stuff getting shortable and the price going down.

Reallly?

Consider this.... If no one can short something then all you can do is ignore
or like it. In that case it only takes one investor to make the price go up.

With shorting you get a much more accurate view of what people value something
at as you can bet on the downside.

More importantly it allows for arbitrage, which is the very market force that
keeps our prices accurate.

Shorting doesn't mean prices will always go down, you could have shorted China
to disastrous results in the past 4 years but it does cause a dampening effect
in prices.

Or maybe a more direct example, if shorting doesn't have any effect on prices
decreasing then why do many markets have a short sale rule?

If shorting doesn't have a connection to prices going down, why did the US
prevent shorting of financial stocks during 2008?

~~~
lordnacho
Sure, I understand those ideas. Just saying the example given was weak.

Weak for what it tries to support, in any case. You still have to explain how
things went up so much when it was known futures were about to start trading,
and why it would go down so much right after. Why would people be buying it
like crazy if it was a generally known thing that when something becomes
shortable, it goes down?

Maybe look at the introduction of other exchange traded futures rather than an
OTC market.

Long term it matters whether things can be shorted, of course. But they're
trying to say a very specific turn in the market was caused by this. And like
the other poster says, it's not even true that it wasn't shortable.

------
JackFr
This is like saying when CME started trading weather contracts in 1999 it
caused global climate change.

[http://www.cmegroup.com/trading/weather/temperature/us-
month...](http://www.cmegroup.com/trading/weather/temperature/us-monthly-
weather-heating_contract_specifications.html)

~~~
JackFr
I don’t understand the downvote.

If a future is cash settled it doesn’t exert pressure on the underlying. No
matter how many weather contracts you trade you can’t change the weather.

------
unabridged
Not one mention of an ETF (ie the availability of bitcoin to retail
investors). The large run up in December was in anticipation of multiple
bitcoin ETFs by major companies, the futures market was just the appetizer.
And the fall was caused by the SEC putting them on hold.

~~~
jraines
not true. That happened in early-mid 2017. Yes, there were more applications
late in the year, but the run up in Nov/Dec was just mania (Coinbase #1 on app
store). Yes, volume manipulation, tethers, etc, etc, but that retail
speculator mania was the main thing.

------
Moral_
What is this guy talking about (from the article):

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.

All BTC futures contracts are cash settled, there is no underlying asset being
exchanged.

~~~
jonknee
It could be more clear, but the strategy is the same. Sell a contract now and
hope to buy it back cheaper in the future. It doesn't matter too much how it's
settled.

~~~
JackFr
> It doesn't matter too much how it's settled.

It matters very much how it is settled. Right now BTC drives the price of the
future, but there isn't a mechanism for the price of the future to pressure
the price of BTC.

~~~
jonknee
You don't have to play in arena one or the other. You can say, hedge a long
BTC position by selling futures contracts. Or if the markets get out of
balance you can buy in one and sell in the other until they come into sync. If
you sell a bunch of over priced futures you will want to buy a bunch of BTC to
balance the book and that will move the price of BTC.

~~~
JackFr
But if I have an unhedged futures position and I don’t buy or sell BTC — and
because it’s cash settled, I never have to — I can’t directly affect the price
of BTC.

~~~
jonknee
You're buying or selling the future position with another party and cannot
control what they are doing. Most futures are cash settled and they affect
markets all the same. Nearly $200b worth of S&P 500 E-Mini contracts traded
_today_ and not a single share of stock will be directly involved in those
contracts. But you better believe they move the market (just watch what
happens when a monster ES order hits the tape).

------
arisAlexis
author very erroneously throws in a number of $250 in 2015 cost of mining
while discussing fundamental value seemingly unaware of minig difficulty and
halving.

------
usgroup
TLDR: Bitcoin futures enabled short-selling which puts downward pressure on
Bitcoin prices.

~~~
jraines
CME and CBOE volume paled (and still pales) in comparison to Bitmex, where
traders can and did short Bitcoin well before the regulated markets launched.

------
JackFr
This is an astonishingly bad piece of analysis.

The CME contract on bitcoin futures DOES NOT EXERT DOWNWARD PRESSURE on the
spot price. Bitcoin futures are cash settled in dollars. "Bitcoin futures are
financially-settled and therefore do not involve the exchange of bitcoin."
[[http://www.cmegroup.com/education/bitcoin/cme-bitcoin-
future...](http://www.cmegroup.com/education/bitcoin/cme-bitcoin-futures-
frequently-asked-questions.html)] . Therefore when you buy a bitcoin future
you exert as much pressure as betting on the NBA finals affect the outcome.
There is a perhaps a media effect, but that is of second or third order.

If one were able short bitcoin, or one had to deliver or receive bitcoin on
tract expiry, that would create downward pressure.

Similarly the authors contention that it was the growth of asset backed CDS
which brought an end to the housing market bubble is simply not true either.
ABCDS had been traded in volume for a long time before the crisis. The
proximate cause was (as it almost always is) credit and leverage. When the
liquidity dried up, the prices came crashing down.

~~~
jonknee
Traders aren't limited to one market or the other and there are plenty of
arbitrageurs who will buy/sell futures and do the opposite in the spot market
to squeeze out any discrepancies. If the futures are "expensive" you sell them
and buy BTC. Reverse if they are "cheap".

~~~
JackFr
Where can you short BTC in the spot market?

~~~
jonknee
Some overseas exchanges allow it (Bitfinex probably the largest), but that
would also introduce some counter party risk. Large owners of BTC could be
playing in the futures market or loaning their stake to hedge funds / prop
shops.

