Bitcoin Price Decline Driven by Q4 Futures Launch, Fed Researchers Claim
On 7 May 2018, the Federal Reserve bank of San Francisco stated in an Economic letter the cause of price drop from 20,000 Dollars peak at the end of previous year was due to Bitcoin futures trading.
The Top Bitcoin prices lined up with the day the Chicago Merc (CME), introduced Bitcoin futures trading on 17 December 2017.
The introduction of Futures Trading have changed the face of investing in Bitcoin - What's Been The Impact?
The Chicago futures market was the reason for such tremendous losses.
"The rapid runup and following decrease at the price after the debut of stocks will not look like a coincidence", 4 researchers wrote at the regional Fed bank's most recent Economic Letter.
The researchers pointed out that a similar pattern was observed mortgage-backed securities, which they said hinged on the same driving force of optimistic and pessimistic traders.
Since bitcoin's high of almost $20,000 in mid-December, it has dropped more than 52 percent to $9,184.16 as of 1:36 p.m. EST on Tuesday (May 8), according to data shown by Coinmarketcap.
The letter said because of that, it was "extremely hard, if not impossible, to bet on the decline in bitcoin price".
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These trades allowed the speculators to bet on the fall Bitcoin's value. Between December 2017 and now, Bitcoin went from a almost a $20,000 bull investment to a $6,500 bear market and had everyone again questioning the legitimacy of decentralized applications and blockchain assets. "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".
The Pessimists had no financial way to back a belief that the Bitcoin price would collapse.
As to why the price of bitcoin fell gradually rather than fast is hard to explain, the researchers noted.
But a competing cryptocurrency becoming more widely used could cause Bitcoin to "drop precipitously because these tend to be winner-takes-all markets", Fed researchers said.
As for why it turned out to be a gradual fall instead of an overnight collapse, researchers said that it can be a scarcity of openness or attention to join industry on the first week of trading.
To understand the application of futures as an investment, and its significance for bitcoin.
The rapid price rise and its decline following the issuance of futures is consistent with pricing dynamics suggested elsewhere in financial theory. But as speculative dynamics subside from the market, transactional benefits will likely drive valuation.
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