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Bitcoin Price Drop: Tom Lee Blames Expiring Futures Contract

Tom Lee has finally added his voice to the current Bitcoin price dip. The Fundstrat chief researcher said that the expiration of Bitcoin futures contracts might have caused the recent BTC price decline. The number cryptocurrency shaved more than $1,000 from its value in the last one week.

Relationship Between Expiring Bitcoin Futures and BTC Price

According to Lee, there is an apparent relationship between the expiration of Bitcoin futures and the price of BTC. BTC usually drops by an average of 18 percent in the ten days leading up to the expiry of Bitcoin futures. Lee also noted that the price typically rebounds six days after the contracts expire.

Lee revealed that there has a total of six expirations since Cboe launched its Bitcoin futures contracts. The most recent of these expirations was on June 13 which coincides with the current price plunge. On June 10, BTC took a considerable tumble, losing 10 percent in a matter of hours. In his June 14 report, Lee referred to Justin Saslaw’s theory and said that Bitcoin “falls into expiration.”

Thus, a trader goes long on Bitcoin but shorts futures when close to expiration date, they can earn a decent profit. According to Lee, this is because there is always a massive selloff at this time, causing the price drop and making the short position on futures highly profitable. Most holders will elect to sell at volume weighted average prices (VWAP) to reduce tracking error.

Both Cboe and CME launched their Bitcoin futures contracts in December 2017 in what was heralded as a big step for Bitcoin. The launch of these futures contracts coincided with a massive bull run for BTC that saw the price almost eclipse the $20,000 mark. Since the emergence of futures tied to BTC, calls have intensified for the introduction of Bitcoin ETFs. However, regulatory bodies like the United States SEC continue to delay approval.

An Intersection of Woes

The expiration of futures contracts may not be the only reason for the BTC price plunge. Lee admits that there has been a combination of factors leading to a “gut-wrenching” weakness in the number one cryptocurrency. According to Lee, the recent futures contracts expiration coincided with a period of low cryptocurrency liquidity and slow institutional adoption. Lee believes that there is more net supply in 2018 due to ICOs, capital gains taxes, and mining rewards. The slow pace of institutional tools has also slowed down the pace of Bitcoin’s growth.

In the midst of the decline, some commentators placed the blame for the BTC price plunge to the Coinrail hack and price manipulation. The Coinrail hack explanation has since been debunked seeing as the South Korea-based platform isn’t a major player in the market to cause such a significant decline. A recently published research paper by the University of Texas claimed that Bitcoin prices were inflated by manipulating the price of Tether (USDT).

Do you agree with Tom Lee’s position on expiring futures contracts being the cause of the latest BTC price plunge? Keep the conversation going in the comment section below.

Image courtesy of CoinMarketCap.

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Within Seconds of Bitcoin Futures Commencing, Bitcoin Surges $700 Instantly

Within seconds of bitcoin futures launching, spot price began instantly and very quickly moving up, rising to a high of $16,300 from around $14,600, up almost $2,000.

Expected volatility followed, with bitcoin’s spot price falling by $1,300 within five minutes, before jumping up and down again to settle at a current price of around $15,600 at the time of writing.

bitcoin price futuresBitcoin’s price action minutes after futures launch.

CBOE’s futures page crashed, presumably due to heavy demand, with us and many others frantically refreshing to get those first stats.

When we gained a brief glimpse, bitcoin futures were shown to be almost $1,000 above spot price.

cboe futuresCBOE first futures stats.

Wall Street, therefore, seems to be just as bullish as the rest of us, with future prices opening, and standing at the time of writing, hundreds of dollars higher than spot price.

So launching a new era for the asset when the new, in many ways, seems little different than the old.

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Bitcoin Futures Details Released

The news article that arguably sent Bitcoin on its skyward surge three weeks ago has had an update this week. Both the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE) have released details on upcoming futures contracts for the digital currency.

The proposed launches of Bitcoin trading contracts caused a price jump of over a thousand dollars per BTC at the beginning of this month. This has continued unabated seeing the crypto currency break record after record, the last being just above $8,200 on November 20.

According to reports, CME announced that its Bitcoin futures product would be available for trading in mid-December but in reality the actual date has yet to be confirmed. The exchange website currently states that futures contracts will be available before the end of the year pending all relevant regulatory review periods.

The details of the actual contracts were released and they will comprise of 5BTC with spot position limits set at 1000 contracts. The smallest price fluctuation, or tick, will be set at $5 for each Bitcoin in a contract, or $25 in total for the full five.

The CBOE released their contract details in a similar statement. Their contract will be a 1BTC (or XBT) with a tick of $10. They are also under regulatory review. Several expirations may be listed such as standard, or monthly, contracts listed to expire for three continuous months and farther out for months on the March expiration cycle (Mar, Jun, Sep, Dec).  There may also be up to four serial weekly expirations according to the CBOE blog.

Exchange CFA Russell Rhoads when on to comment:

“The question I am constantly hearing is, “How will the futures prices relate to spot Bitcoin pricing,” and the best (and most honest) answer I can give is, “I don’t know.”  I’ve done academic work on the launch of new listed products in the past and prior assumptions about new markets often are off the mark.  I’ve heard arguments for the futures trading at both a premium and a discount to the spot price, personally I think the best strategy is to see what the market tells us when Bitcoin futures are available for trading.”

This early adoption and institutionalization of Bitcoin by major financial exchanges will only strengthen is overall standing in a volatile crypto market. This has been clearly evident in prices this week which continue to set new highs.