Arcane Research: BTC Prices Might Have Been Manipulated Before CME’s Bitcoin Future Settlement Dates
According to the latest research by Arcane group, Bitcoin prices have fallen on average by 2% before the settlement date of CME's bitcoin futures contract, reported Kryptografen.
CME bitcoin futures contract was launched back in 2017 for institutional investors on Wall Street. The contract expires monthly, and several reports pointed towards the peculiar price drop towards the end of its expiry date every month. The research found out, in the last 20 months the prices have fallen constantly in 15 months.
The market manipulation theory gains even more weight for the fact that these contracts are settled in US Dollars rather than bitcoin. The future contracts are majorly traded by institutional investors, thus investment is also quite significant which makes it much easier to sway the market movement.
Average Bitcoin price fall on a daily basis shows great deviation before settlement dates
A fall in prices benefits the investor as they need to pay less in dollars. Thus, according to the theory, these Wall Street investors go long on ‘physical' bitcoin which they can hold and go short on futures contracts. By following this strategy they become resistant to market fluctuation.
If the price of bitcoin rises, they have to pay a higher settlement on their futures contracts, however, those losses are counterfeited by the gain on ‘physical' bitcoin they hold. On the other hand, they can sell off their ‘physical' bitcoin towards the settlement date which would trigger a fall in prices in the spot market, and then they can profit on the settlement contract as well by paying a small price.
The research found out that during the period between January 2018 and September 2019, on any given random day, bitcoin prices have fallen on average by only 0.06%, however, if we specifically look at a day near the contract settlement date, the average fall is a significant 2.27%. The research notes that,
“To avoid losing important price movement, while not including too much irrelevant noise, the interval being checked is set to 1.5 days. As the settlement is at 4 pm in London last Friday of the month, the price movements are checked this day, as well as the day before the settlement. This then implies the last 40 hours before the settlement time. Including only the last 24 hours before settlement means that much of the day before a settlement is excluded, and a slightly broader interval appears to be more suitable. All figures for returns in the analysis are calculated for intervals of 1.5 days, for a correct comparison basis. Analysis of intervals in addition to micro-dynamics on the various spot exchanges prior to settlement is a natural extension of this analysis.”
The prices have fallen mostly when the market sentiment was bullish
Another interesting thing to note is that Bitcoin prices have fallen most in the months when the market sentiment was bullish and the average daily return as high as 4%.
The research mentioned that statistically, the probability of such a consistent fall in prices (15 out of 20) is less than 2%. The report also noted that they did not take into consideration several factors which would provide a clearer pattern in prices, and thus further analyses are required. The research report said,
“One should look more closely at the micro-dynamics in the various spot markets around settlement and signing of new futures contracts, and compare this with the value of outstanding contracts/contracts being settled.”
“In addition, qualitative studies, where you directly contact those who sign and trade the bitcoin futures contracts at CME, could be of great value in order to shed light on the situation.”
Looking at these observations and hypothesis, the fall in prices right before settlement dates on such a consistent basis can't be a mere coincidence. Thus, further studies into the issue might reveal many other factors related to these market manipulation.