With Bitcoin price currently riding at $9,168, Bitcoin is quite a long way from its all-time high of about $20,000. According to the Federal Reserve Bank of San Francisco’s research paper, the billions of dollars lost in the bitcoin’s December crash was caused by the CME.
CME’s Bitcoin derivatives are the culprit
Since December’s peak of nearly $20,000, Bitcoin has crashed more than 50 percent with its current value being $9,168. But what exactly caused this crash?
The reason for such a tremendous loss is the Chicago futures market. According to the research of the Federal Reserve Bank of San Francisco, the fall in the prices of bitcoin wasn’t a coincidence rather coincided with bitcoin futures trading on the Chicago Mercantile Exchange (CME).
On December 17, 2017, the derivatives trading opened on the CME that allowed the speculators to bet on the fall in the value of bitcoin, unlike the popular and only available method to trade on bullish sentiments before the introduction of derivatives.
Analysts Galina Hale, Arvind Krishnamurthy, Marianna Kudlyak, and Patrick Schultz explained that: “The new investment opportunity led to a fall in demand in the spot bitcoin market and therefore a drop in price.”
The paper further states:
“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.”
Talking about the end of December’s explosive growth that “ended on December 17, 2017, when bitcoin reached its peak price of $19,511. Notably, these dynamics aren’t driven by overall market fluctuations as shown by comparison with the Standard & Poor’s 500 stock index.”
The pricing dynamics affected by optimizing & pessimistic investors
After obtaining the approval from the Commodity Futures Trading Commission (CFTC), the CME Group and Cboe moved their bitcoin futures near the end of the year when the bitcoin price was at its peak. After the constant surge throughout the last year to reach the $19,511 level, the bitcoin price took the hit only to drop down to $6,000 by February’s first week.
The paper explains that the
“rapid rise of the price of bitcoin and its decline following [the] issuance of futures on the CME is consistent with pricing dynamics suggested elsewhere in financial theory.”
This kind of pricing dynamics apparently showcases a trend where initially the demand for a financial instrument is driven by optimists resulting in the rise of prices to the point where a mechanism is introduced in the market that pessimist takes the advantage of in order to invest in the opposite manner as argued by the researchers:
“And until December 17, those investors [optimists] were right: As with a self-fulfilling prophecy, optimists’ demand pushed the price of bitcoin up, energizing more people to join in and keep pushing up the price. The pessimists, however, had no mechanism available to put money behind their belief that the bitcoin price would collapse. So they were left to wait for their ‘I told you so’ moment.”
But these sort of trends do not continue for an indefinite period, they come to an end as happened in the case of bitcoin as well.
What are your views on CME’s bitcoin derivatives being the cause behind bitcoin’s massive crash?
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A computer science engineer, I have been adamantly following the blockchain and cryptocurrency industry for the past 2 years. A crypto enthusiast and hardcore blockchain follower. Reach out to him at [email protected]