Did Bitcoin Futures Trigger Cryptocurrency Collapse?


Bitcoin futures may have triggered the massive plunge in prices on cryptocurrency markets over the past seven months.

In December, Bitcoin peaked at an all-time high of $19,345, but has been in free fall ever since along with every other coin and token.

Since peaking, the market has seen a correction of between 70% and 80%.

Investors and economists have made two observations.

Firstly, the cryptocurrency market is still in infancy, and wild price swings should be expected in the same way as babies have tantrums.

Peak and trough

Investors like BitMEX CEO Arthur Hayes talk up cryptocurrency investment by pointing out that despite the volatility, the market is still 300% up in 12 months.

Japanese economist Yukio Noguchi has put forward another theory – the opening of a Bitcoin futures market late in 2018 directly contributed to the fall in price and that because of the market, the price of Bitcoin will not rise to such levels again.

The Cboe Futures Exchange started trading Bitcoin on December 10. The price peaked five days later.

The US Federal Reserve in San Francisco supports his view.

In a paper, the Fed says: ““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 behaviour that typically accompanies the introduction of futures markets for an asset.

Self-fulfilling prophecy

“As with a self-fulfilling prophecy, demand from optimists pushed the price of bitcoin up, energizing more people to join in and keep pushing up the price. 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.”

This came with the opening of the futures market which gave them that mechanism.

Other respected investors are split over the future of cryptocurrency.

Some, like billionaire Warren Buffett claim that cryptocurrencies are a bubble waiting to burst, speculation at best and Ponzi schemes at worst. Others, like security innovator John McAfee, hail them as the future and see digital currency replacing traditional cash.

The Fed economists point to the housing bubble a decade ago, which was driven by financial innovation such as securitization of mortgage debt.

“The subsequent bus was driven by the creation of instruments that allow pessimistic investors to bet against the housing market,” they said in the report How Futures Trading Changed Bitcoin Prices