Bitcoin Futures the Cause of Bitcoin value drop in Dec 2017 Claims Federal Reserve

The bank states the cause of price drop from 20,000 USD peak was Bitcoin futures trading

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On 7th May 2018, the Federal Reserve bank of San Francisco stated in an Economic letter the cause of price drop from 20,000 USD peak at the end of last year was due to Bitcoin futures trading. The letter sent out by Federal Reserve mentions that “the rapid run-up and subsequent fall in the price after the introduction of futures does not appear to be a coincidence” and “it is consistent with trading behavior that typically accompanies the introduction of futures markets for an asset”.

In mid-December 2017, the highest value of Bitcoin marked with the launch of Bitcoin futures by the Chicago Mercantile Exchange (CME). This was one week after the launch of Bitcoin futures by Chicago Board Options Exchange (CBOE) which did not yield high trade.

Federal Reserve explanation on Bitcoin price fluctuations

As the letter describes, investors with an optimistic view betting for a value increase drove the bitcoin surge. More optimists led to higher demand of the cryptocurrency.

Pessimists got the chance through Bitcoin futures to bet on a drop of price, creating a new investment opportunity leading to the fall of the Bitcoin value in the market.

The launch of Bitcoin futures allowed pessimists to enter the market, which contributed to the reversal of the Bitcoin price dynamics.

It is mentioned in the letter that the value of Bitcoin did not drop in one night after the Bitcoin futures launch by CBOE and CME due to low trade volume of bitcoin in the future market. The value of Bitcoin in that market will rely on the demand and adoption of the digital currency by conventional financial institutions as “collateral, a means of payment, or a direct investment”;

If a different cryptocurrency becomes more widely used as a means of exchange in the markets currently dominated by Bitcoin, demand for Bitcoin may drop precipitously because these tend to be winner-takes-all markets.

A former governor of the Federal Reserve stated last week that if he was chosen instead of Jerome Powell as the Chairman of the Federal Reserve, he would have introduced a working group to look into a federal cryptocurrency.

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