The head of research at Fundstrat Global Advisors, Thomas Lee, says the expiration dates of future contracts may be a cause of market volatility and may be part of the reason Bitcoin’s price slid this past week.
Chicago Board Options Exchange (CBOE) Bitcoin futures contracts for June expired on 13 June 2018, and that same day Bitcoin dropped as low as USD 6,100 on Bitfinex. Lee says that Bitcoin drops on average 18% in the 10 days leading up to monthly futures contract expirations. So far there have been six future contract expiration dates since Bitcoin futures launched on CBOE in December 2017.
There were a couple of exceptions, in February 2018 Bitcoin price went up 15% as the expiration date approached, and in April 2018 Bitcoin’s price went up 16%. Lee says a more general observation is that there is significant price volatility, up or down, around Bitcoin futures contract expiration dates.
Lee found through his analysis that Bitcoin prices generally recover six days following contract expiration. Indeed, Bitcoin has recovered since the 13 June 2018 futures contract expiration from its low of USD 6,100 to USD 6,600 as of this writing, but has a ways to go before getting back to levels near USD 7,500 ten days before the contract expiration.
The possible logic behind Lee’s findings is that an investor who is holding a long Bitcoin position but shorting the futures may sell large amounts of Bitcoins as the expiration date approaches to minimize tracking error. Then the investor may sell all of their remaining Bitcoin, and if it’s a large enough sell it could cause the market to drop, which would increase the investor’s profits from their short position.
Bitcoin has billions of USD of trading volume per day, so it seems unlikely that investors trying to make profits shorting the futures markets would have enough money to drop global Bitcoin price. In any case, the Commodities Futures Trading Commission is investigating Bitcoin exchanges to see if any price manipulation related to futures trading has been occurring.
President and chief operating officer of CBOE Global Markets, Chris Concannon, says that the fall of Bitcoin’s price can be more easily explained by bad news and that the CBOE futures don’t have as much influence on the global Bitcoin market as Lee is saying.
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