Fed research explains Bitcoin crash price
Researchers at the San Francisco Federal Reserve have released an economic letter which claims that the introduction of the Bitcoin futures market was a significant factor in its price decline after its peak in December 2017.
The economic letter, released on May 7, states that prior to the introduction of the futures market in December 2017, investors had no way to bet against Bitcoin. But all that changed when Bitcoin futures were introduced by the Chicago Board Options Exchange (“CBOE”) on December 10, 2017, followed by the CME on December 17. As the paper says: “With the introduction of bitcoin futures, pessimists could bet on a bitcoin price decline, buying and selling contracts with a lower delivery price in the future than the spot price…. 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.”
The researchers compared this price reaction to mortgage-backed securities, which they said hinged on the same driving force of optimistic and pessimistic traders.
The paper states that throughout BTC’s inception the value of the coin remained under $4,000 but climbed “dramatically to nearly $20,000, but descended rapidly starting in mid-December,” explains the Fed’s economic study. The researchers go on to state: “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.”
They added the reason as to why it was a slow and gradual fall rather than an overnight collapse. They said it could be a lack of attention or willingness to enter the market in the first week of trading.
The San Francisco Federal Reserve research study also showed that as any financial institutions which have a traditional structure become more willing to accept Bitcoin, and official recognition and regulatory acceptance of Bitcoin as a means of payments could help the future prices and demand.
The researchers added: “These markets tend to be winner-takes-all markets hence opening up a possibility for competing cryptocurrency to become more widely used which in turn could cause bitcoin to drop precipitously.”