Research study blames CME Bitcoin futures trading for crash

According to a recent research study, CME Bitcoin trading was to blame for the cryptocurrency market’s dramatic fall from December highs.

Despite a recent recovery, Bitcoin is trading a long way from the record-breaking high f close to $20,000.

Now, a research paper published by Federal Reserve Bank of San Francisco says the CME caused the billions of dollars wiped off the crypto market.

CME Bitcoin derivatives are to blame

In mid-December, Bitcoin reached its all-time peak price of almost $20k.

It fell to recent lows of $6000 in early February before rising back to its current value of around $9,250.

But what exactly was behind this massive correction?

The Chicago futures market was the reason for such tremendous losses.

According to the research study by the Federal Reserve Bank of San Francisco, the fall in Bitcoin values wasn’t a coincidence.

The dip coincided directly with Bitcoin futures trading on the Chicago Mercantile Exchange (CME).

The CME opened derivatives trading on December 17, 2017.

These trades allowed the speculators to bet on the fall Bitcoin’s value.

According to analysts Galina Hale, Arvind Krishnamurthy, Marianna Kudlyak, and Patrick Schultz, CME caused the price to drop, saying:

“The new investment opportunity led to a fall in demand in the spot bitcoin market and therefore a drop in price.

“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.

“Bitcoin’s growth ended on December 17, 2017, when bitcoin reached its peak price of $19,511.

“Notably, these dynamics aren’t driven by overall market fluctuations as shown by comparison with the Standard & Poor’s 500 stock index.”

Pricing dynamics

The CME Group and Cboe moved their Bitcoin futures near the end of the year when the bitcoin price was at its highest, after winning approval from the Commodity Futures Trading Commission (CFTC).

After the monumental rise in 2017, Bitcoin fell back down to $6,000 on February 6.

The paper explains further:

“rapid rise of the price of bitcoin and its decline following [the] issuance of futures on the CME is consistent with pricing dynamics suggested elsewhere in financial theory.”

These pricing dynamics showcase a trend where initially the demand for financial instruments is driven by optimists.

This optimism results in the rise of prices to the point where the pessimist takes the advantage to invest in the opposite manner as explained by the researchers:

“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.”

According to the research, this type of trend doesn’t continue permanently.

This movement comes to an end, which is what has happened with Bitcoin prices, as value are recovering.

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