While many people had glossed over this little-known statement released by the Federal Reserve earlier this year (in May), but according to the letter, the government body blamed the launch of Bitcoin futures markets on the Chicago Mercantile Exchange (CME) for adversely affecting the overall value of Bitcoin (as well as many other alt-assets available in the market today).
A Brief History of the Matter
For those who may not remember, Bitcoin Futures were first launched by the CME on 17 December 2017, the very same day when Bitcoin scaled up to reach its ATH (all time high) price point of around USD $20,000. However, since that day, the price of BTC has gradually kept on sliding (eventually culminating in its present value of just under $4,000).
While defending its bold proclamation, the Federal Reserve stated that this market behavior is not unique to Bitcoin but has also been seen with other asset classes (especially when the option of futures trading is first introduced). For example, the mortgage industry too experienced a similar fate when a few exchanges started allowing investors to start trading in mortgage securities some years back.
Additionally, the post by the government agency states that every time a new asset class is made available to the masses, “there are always optimistic investors that help drive the value of the asset up buy buying large chunks of it”. However, as and when futures markets are launched, more often than not, pessimistic investors start short selling their assets (wherein they start buying futures contracts via a loan and subsequently sell them for cash and then buy back the contracts later at a lower price before the contracts expire).
According to the Federal Reserve, if the CME had not launched Bitcoin Futures contracts, the digital currency could have kept on increasing past its max value of around $20,000.
Lastly, the opportunity laid forth by Bitcoin futures diverts investment in a big way from the ‘spot market’ domain. As a result of this, investment into futures does not really have a positive effect on the spot demand for Bitcoin (but in fact, causes Bitcoin’s price to go lower as the money being invested into the futures is diverted from the spot market itself).