The precipitous drop of bitcoin after it scaled its high price of nearly $20,000 has direct correlation to the launch of a futures market, claims the research from the San Francisco Federal Reserve.
“The rapid run-up and subsequent fall in the price after the introduction of futures does not appear to be a coincidence,” four researchers indicated in the regional Fed bank’s updated Economic Letter. “It is consistent with trading behavior that typically accompanies the introduction of futures markets for an asset.”
The peak of bitcoin prices lined up with the day the Chicago Mercantile Exchange, or CME, launched bitcoin futures trading on Dec. 17. That very same day, bitcoin reached a high of $19,783. The Chicago Board Options exchange, or CBOE, also initiated a futures market a week earlier but trading there was thin, the letter stated.
Until futures began, it was difficult, if not impossible, to hinge bets on the drop of bitcoin prices, the researchers claimed. As confident investors continued to line up their bids, the cryptocurrency rose more than 1,300% in 2017.
The pessimists on the other hand, had no financial way to back a belief that the bitcoin price would dip.
“So they were left to wait for their ‘I told you so’ moment,” the researchers said. “The launch of bitcoin futures allowed pessimists to enter the market, which contributed to the reversal of the bitcoin price dynamics.”
The researchers compared this price shift to mortgage-backed securities, which they said leaned on the same force of optimistic and pessimistic traders.
As for why it was a slow fall rather than an overnight breakdown, researchers attributed it to a potential lack of attention or willingness to penetrate the market on the first week of trading.
Future prices and demand could be aided by any conventional financial institution becoming more open to accept bitcoin, and official recognition and regulatory acceptance of bitcoin as a means of payments, they wrote.
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