Bitcoin futures trading impact
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Large Bitcoin Options Positions May Boost Price Volatility This Week - CoinDesk
The Bitcoin futures premiums often fluctuate between the two aforementioned positions, with extreme values being recorded a number of times since the development of this market. Distinct patterns in behaviour have allowed speculators to more accurately determine trends as a result of these codependent markets. The Bitcoin futures market operating in contango offers big players an incentive to sell futures contracts in order to hedge risk and lock in future asset value. This positions short term speculators as some of the only futures buyers, ultimately dampening volatility which we have been seeing since the inception of futures markets.
Alternatively, backwardation occurs when speculators short aggressively or when an aggressive downturn in the futures or spot market causes liquidations and a reversal of contango. A market operating in backwardation is an opportunity for large investors to buy futures contracts at a discount, closing out their hedges and taking increased profit.
As futures have low value when trading at a discount to the spot price, investors can sell their holdings in the spot market and purchase discounted futures to maintain exposure. This structure leads to limited periods of backwardation. The most recent example of these market forces in play was prior to the Covid crash in March when much of the world was ignorant of the effect that the virus would ultimately have on markets. From a long-term standpoint, the introduction of the bitcoin futures market has little to no impact on price — as long term value is driven by core fundamentals adoption, use-cases etc.
However, the futures do strengthen the integrity of the market, by limiting volatility and providing deeper liquidity for institutional participants. As it provides investors another lens to analyse the bitcoin market through, they can more effectively determine market sentiment and act accordingly. It also gives an opportunity to hone in wild speculation and as shown above and assists in price discovery.
The introduction of derivatives to the bitcoin market was a positive move that ultimately solidifies the financial framework of the asset.
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- Evidence from the Introduction of Bitcoin Futures Contracts.
By increasing market capitalisation and trade volume, the additional access points have allowed investors to treat BTC holdings as they would a traditional investment. This brings more interest to the space and contributes to the establishment of bitcoin as a strong investment choice. Futures trading opens up doors for investors with large holdings as they can leverage their existing balance sheet and capitalise on arbitrage profits, yield from their holdings.
This method is of particular use to OTC crypto firms as they can use their custody holdings to generate interest for their clients.
By securing their holdings with futures contracts, firms limit their downside while boosting upside tremendously for their clients. Derivative markets have been fundamental to trade and finance for centuries, playing a key role in the management of market cycles and asset volatility.
Impact of Futures Market on Bitcoin and its Investors As it provides investors another lens to analyse the bitcoin market through, they can more effectively determine market sentiment and act accordingly. It also gives an opportunity to hone in wild speculation and as shown above and assists in price discovery. Downloadable! Bitcoin futures were launched by the Chicago Board of Options Exchange and the Chicago Mercantile Exchange group on December 18th, .
The value that futures derivatives add to the increasingly mature bitcoin and cryptocurrency space is immense. Not only does it aid in legitimising the asset class, but it also provides an additional method of investing in the space. This makes the market more attractive not only for speculators but fuels institutional investment activity.
With a spectrum of investor profiles all capturing the value that these markets can provide, the credibility of the crypto space and bitcoin is set to strengthen further in the coming years.
McIntosh, R. Weber, E. Bradley, E. Derivatives in Crypto, Explained. Stenner, N. The Term Structure of Commodity Risk.
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Ether seeks to escape bitcoin's shadow with CME futures launch
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How do futures contracts affect Bitcoin prices? Registered: Jamal Bouoiyour Refk Selmi. This study stands as a first attempt to explore the reactions of Bitcoin spot market to the launch of futures contracts. Using an event-study methodology and an adjusted asset pricing model, we show that Futures trading drove up the price of Bitcoin immediately after the announcement day.
This reaction started to decrease noticeably following the launch of the futures contracts.
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Such outcome seems in line with the trading behavior that typically accompanies the launch of futures markets for an asset. Handle: RePEc:ebl:ecbull:eb as. Corrections All material on this site has been provided by the respective publishers and authors. Louis Fed.