File under: Why didn’t I think of that?
From Bitcoin’s inception in 2009 through mid-2017, its price remained under $4,000. In the second half of 2017, it climbed dramatically to nearly $20,000, but descended rapidly starting in mid-December. The peak price coincided with the introduction of bitcoin futures trading on the Chicago Mercantile Exchange. 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 behavior that typically accompanies the introduction of futures markets for an asset.
This is from Galina Hale, Arvind Krishnamurthy, Marianna Kudlyak, and Patrick Shultz, “How Futures Trading Changed Bitcoin Prices,” FRBSF Economic Letter, May 7, 2018.
And:
The peak bitcoin price coincided with the day bitcoin futures started trading on the Chicago Mercantile Exchange (CME). In this Economic Letter, we argue that these price dynamics are consistent with the rise and collapse of the home financing market in the 2000s, as explained in Fostel and Geanakoplos (2012). They suggested that the mortgage boom was driven by financial innovations in securitization and groupings of bonds that attracted optimistic investors; the subsequent bust was driven by the creation of instruments that allowed pessimistic investors to bet against the housing market. Similarly, the advent of blockchain introduced a new financial instrument, bitcoin, which optimistic investors bid up, until the launch of bitcoin futures allowed pessimists to enter the market, which contributed to the reversal of the bitcoin price dynamics.
READER COMMENTS
Henk van Arkel
May 15 2018 at 1:02pm
This makes total sense to me. But what puzzles me is how the 2nd phase will develop. Can we expect parralels again or is it a roulette game?
Bob Murphy
May 15 2018 at 1:41pm
David,
I didn’t think of that either; I was thinking the futures market would (if anything) help stabilize prices.
You could make a pitch to this guy and ask only 1 percent of the fees.
David R Henderson
May 15 2018 at 2:10pm
@Bob Murphy,
Thanks. I would bet that it will stabilize bitcoin prices but at a lower level.
Re Bill Gates, LOL. Thanks.
MikeP
May 15 2018 at 3:32pm
There is no shortage of Congresspersons who know how to fix this persistent problem of speculators squelching market valuations.
Alan Goldhammer
May 17 2018 at 4:41am
How do you know that it was not “Bubble” recognition? I think this is a more probable choice.
David R Henderson
May 17 2018 at 7:33am
@Alan Goldhammer,
How do you know that it was not “Bubble” recognition? I think this is a more probable choice.
It almost certainly does reflect the view of many people that the bitcoin price was a bubble. That’s a big part of the authors’ point. Once you recognize that, how do you bet against the bitcoin? You can’t. The most you can do is refrain from buying. Only when there’s a futures market can you actively bet against it.
Alan Goldhammer
May 17 2018 at 11:23am
@David Henderson – of course! Senior moment, that was the whole predicate of ‘The Big Short’ with the mortgage stuff over a decade ago.
Keith
May 24 2018 at 5:49am
It’s true that betting against Bitcoin became much easier after the introduction of Bitcoin futures. But there were indirect ways to short Bitcoin before that. For example, see the article “5 Ways to Short Bitcoin.” They are:
1. Margin trading
2. Futures trading (OK, there are 4 besides this one)
3. Binary options trading
4. Prediction markets
5. Short-selling BTC directly
Of course, there are other even less direct methods. Being long anything that varies inversely with Bitcoin is, effectively, a short position with respect to Bitcoin. I haven’t dug into this much, but plausible candidates include unstable currencies (e.g., VEF), purported substitutes like gold, and competing cryptocurrencies.
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