Bitcoin Price Crash in Early 2018 Triggered by Futures Launch

The launch of Bitcoin futures contracts in December 2017 ‘allowed pessimists to enter the market,’ researchers say

by -
09 May • 2 min
In Analysis

Bitcoin’s (BTC) dramatic price slump from its December 2017 peak was tied to the listing of futures contracts, the Federal Reserve Bank of San Francisco suggested in an Economic Letter published on Monday.

The BTC price hit an all-time high of around USD 20,000 on December 17, the same day the Chicago Mercantile Exchange (CME) launched its Bitcoin futures offering and a week after the Chicago Board Options Exchange (CBOE) had introduced a similar product. Afterwards the BTC was dipping into the negative territory to get to as low as USD 6,000 on February 6. It has since stabilized, going above USD 9,000, but remains 54% below its December peak.

According to a group of analysts at the San Francisco Federal Reserve, this trading behavior was probably not a coincidence. "The rapid run-up and subsequent fall in the price after the introduction of futures does not appear to be a coincidence. It is consistent with trading behavior that typically accompanies the introduction of futures markets for an asset,” the researchers wrote.



Bitcoin price rose more than 1,300% in 2017, driven by high demand from bullish investors. The bears, however, had no instrument to back a belief that the BTC price would fall. “The launch of Bitcoin futures allowed pessimists to enter the market, which contributed to the reversal of the Bitcoin price dynamics,” the Fed researchers noted. They added that a similar pattern was observed in mortgage-backed securities, which they said hinged on the same driving force opposing expectations.

The Federal Reserve letter further said it is difficult to determine why the Bitcoin price dropped gradually rather than instantly. The paper noted, however, that it could be because pessimistic investors lack attention, willingness or ability to flow into the market on the first day or week of trading. Trading volumes on the CME futures market were initially low, the Fed said, with an average trading roughly 12,000 bitcoins being delivered in the first week.

As for the future, the researchers said Bitcoin prices would be bolstered by the advent of institutional interest in it, and by its expansion as a means of payment. However, if any cryptocurrency becomes a true rival, it could cause BTC to plummet again, the Fed warned.