Did the expiration of Bitcoin futures cause last week’s crypto collapse?


Analysts are still grappling with the reasons why the crypto market shed nearly $10 billion of market cap last week. Bitcoin, the market leader by far with a 53.4% market share, had suddenly slid from over the $3,500 threshold down to below $3,400. It has since climbed back over this figure, but industry talking heads were quickly declaring that Crypto Winter would turn “nuclear”, if values dipped below $3,000. Technical reasons along the lines of accumulation were cited, but moves such as these are typically caused by fundamentals. Could the expiration last week of Bitcoin futures be the culprit?

The short answer is probably not, but in order to understand why, it is necessary to consider a number of factors about crypto investment markets, exchanges, and the fact that we still have a very nascent industry in terms of infrastructure development. For example, large institutional players like banks and hedge funds expect and rely upon a set of investment tools to perform their daily tasks, which are not completely present today in Crypto-Land.

Their toolbox includes options, index options, and futures contracts. When you are dealing with large investment amounts, it helps to have a number of ways to hedge your position and ensure efficient market entry and exit without causing a major disruption in market price behavior. The crypto market is presently tiptoeing around each of these market instruments, hopefully, paving the way for major buy in by large institutional players, when they feel confident that they can deal effectively in the crypto market.

Options and futures contracts have expiration dates. For stocks, the third Friday in the month is the day. Stock analysts must be very conscious of these dates, especially when many types of instruments expire on the same day, producing what has colloquially been called “double”, “triple”, or “quadruple–witching day”. Strange things can happen in the market, as these days approach and investors rush to cover exposed positions.

Could this phenomenon also apply to Bitcoin price behavior? Supporters of a “yes” answer point to remarks by the San Francisco Federal Reserve that crypto prices had fallen following the launch of CME Bitcoin futures:

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 problem with this theory is that BTC futures today are settled in cash, based on various price-averaging methods. No one is rushing to trade BTC to cover their risk exposures, but the future is changing. Jake Chervinsky, a government litigation attorney, explains:

Noteworthy is the fact that Bakkt will custody and deliver real bitcoin. That means institutional inflows would reduce supply and thus (maybe) increase price too.

This is different from other regulated futures markets like CME and CBOE, which only deal in cash-settled futures.

Bakkt, together with Fidelity and the Nasdaq, could bring new products and services to the market in the near term that could make a difference.

The second consideration is volume of transactions. BTC options and futures markets are very small at this stage of market development, one of the major reasons why the SEC refuses to approve any applications for a BTC ETF. In the commission’s own words:

[The ETFs] have not met the requirement that a national securities exchange’s rules be designed to prevent fraudulent and manipulative acts and practices. Among other things, the Exchange has offered no record evidence to demonstrate that bitcoin futures markets are ‘markets of significant size.

In summary, futures expiration dates have had very little impact on crypto prices to date.

The advent, however, of the highly anticipated Bakkt exchange, Fidelity custodial services, and Nasdaq involvement could change current fundamentals, but only when volume levels are sufficient to correlate with pricing behavior in crypto exchanges.

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