US Federal Reserve: Launch of Bitcoin Futures Led to Bitcoin Price Decline
In case the Bitcoin Price fall down in the first quarter of 2018 still rattles your mind, here’s more information on why that could have happened. The already existing news tells us that the increased regulations and bitcoin taxation may have led the massive bitcoin sell off leading to a drop in Bitcoin price.
Now according to the U.S. Federal Reserve, last December’s introduction of Bitcoin futures, which gave investors an opportunity to bet against the value of the coin, played a large role in the late-2017 and early-2018 bitcoin price decline.
Hopeful investors who had bet that the price was going to rise were the only driver of the Bitcoin surge. Constant price growth attracted more optimists who, in turn, increased the demand even more.
The paper’s authors assert that Bitcoin’s rapid price increase and subsequent decline are “consistent with trading behavior that typically accompanies the introduction of futures markets for an asset.”
“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.”
Federal banking policymakers have been dismissive, especially in recent months, of Bitcoin as an alternative currency to the dollar or other central bank-backed money. San Francisco Fed President John Williams, who next month will move to New York to run the Fed there, has been particularly critical: “One of the problems they have is the values are extremely volatile,” Williams said in April of Bitcoin and other cryptocurrencies.
On December 17, CME Group Inc. became the second exchange, behind the Cboe Global Markets Inc. to list Bitcoin futures. This date coincided with the all-time high (ATH) Bitcoin price, which at the time was trading at around $20,000
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