Did Futures Lead To Bitcoin’s Decline?

By Raghav Sawhney

The economic market pattern in the case of cryptocurrency rates is definitely quite unpredictable. Witnessing a high surge and recording a sharp decline in the Crypto price analysis graph has been an object of interest for the experts, who keep coming up with analyses and predictions of major factors which cause these uncertain phenomena.

The most prominent question that has arisen from the analyses is whether Futures led to Bitcoin’s Decline.

Instead of answering it in a straightforward way by saying YES or NO, firstly there is a need to speculate regarding this and why it had become a topic of analysis. Actually, this came into light after the report published by the Federal Reserve Bank of San Francisco on May 7.

The researchers at the Federal Reserve Bank of San Francisco conducted a detailed research to study the effect of the launch of Bitcoin Futures on the price of Bitcoin. As a result of this research, they published a report as a part of their Economic Letter stating that the major reason behind the fall in prices of Bitcoins is the introduction of Bitcoin futures in the market.

The Federal Reserve Bank’s letter states:

“The rapid run-up and subsequent fall in the price after the introduction of futures does not appear to be a coincidence” and “it is consistent with trading behaviour that typically accompanies the introduction of futures markets for an asset.”

Going back to early December of 2017,  Chicago Board Options Exchange (CBOE) launched Bitcoin futures in the market. A week later, the Chicago Mercantile Exchange(CME) introduced the futures trading too. It can be noted that this was the time when the Bitcoin reached at a peak of $19,783.

The letter also says that the optimistic group were the only ones who were responsible for the Bitcoin surge. And the constant growth in prices attracted more people to invest in Bitcoin futures trading contracts.

But the pessimistic ones were not left with much options so that they can profit themselves via betting a decline on the prices of Bitcoin. But, with the introduction of Bitcoin futures , they got their opportunity. The Bitcoin futures began to cause a fall in the demand ( in the coming times ) and gradually caused a drop in the price of Bitcoin. The letter also quoted this and analysed the future prospects too :

“The launch of Bitcoin futures allowed pessimists to enter the market, which contributed to the reversal of the Bitcoin price dynamics. Futures prices for Bitcoin will depend on demand and adoption of the cryptocurrency by traditional financial institutions as collateral, a means of payment, or a direct investment. If a different cryptocurrency becomes more widely used as a means of exchange in the markets currently dominated by Bitcoin, demand for Bitcoin may drop precipitously because these tend to be winner-takes-all markets.”

Therefore, it can be said that the introduction of Bitcoin futures trading in the market caused a sharp decline in the prices of Bitcoin in accordance with this report published by Federal Reserve Bank of San Francisco. But still there remains a vast ocean left to be explored about the other possibilities too which could be helpful in a way to deal with this price drop.