Three Federal Reserve Bank of San Francisco researchers and a finance professor from Stanford University are in agreement that it was the marketplace futures launch in 2017 which gave rise to the dramatic slump in the price of bitcoin, according to Coindesk.
The Federal Reserve paper describes Bitcoin’s December 2017 fall from a USD 20,000 peak as no “coincidence” pointing out that it was consistent with trading behavior that typically accompanies the introduction of futures markets for an asset.
The researchers pointed out that such markets, namely the launch of Bitcoin futures, played a significant role in the slump, and could be viewed as similar to the US housing bubble which developed in the during the 2000s. In this case, mortgage-backed securities were also susceptible to optimistic and pessimistic traders.
The researchers explain:
“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.”
It was at about this time, at the end of 2017, that the Chicago Board Options Exchange and the CME Group, the world’s leading derivatives marketplace, gained approval for Bitcoin futures trading from the Futures Trading Commission (CFTC). The price of Bitcoin fell to just above USD 6,000 by late February 2018.
Such pricing dynamics, researchers argue, refers to a trend where demand for a financial instrument is initially driven by optimists who push up the price until the point where the market introduces a mechanism that allows pessimists to invest reversely.
The New York Times has reported that the Intercontinental Exchange, owner of the New York Stock Exchange, could become the latest bank to offer bitcoin futures, stating:
“[ICE] has had conversations with other financial institutions about setting up a new operation through which banks can buy a contract, known as a swap, that will end with the customer owning Bitcoin the next day — with the backing and security of the exchange.”