Could bitcoin futures contracts be to blame for sinking market prices?
According to a new report, the expiry of bitcoin futures has been accelerating bitcoin sell-offs this past week. As Cboe and CME futures expire, it’s piling onto the “gut-wrenching” declines.
The report comes from Bloomberg, which interviewed Thomas Lee, head of research at Fundstrat Global Advisors.
Lee sees “significant volatility” around Cboe and CME futures expirations, even as sentiment and technical factors have also been “awful”.
Lee released a report on the market on Thursday. In that report, Lee cited Justin Saslaw’s theory that bitcoin seems to fall into expiration. Lee describes how there have been six expirations since Cboe bitcoin futures contracts launched – including the latest expiration on June 13.
In the 10 days preceding expiration, bitcoin’s price has fallen by 18% on average. Within six days after the expiration, the price of bitcoin has recovered.
Here’s why this price movement is occurring, according to Lee:
“If a trader is long Bitcoin and short the futures, as contracts move closer to expiry, holders may sell a large share of the coins at volume weighted average price (VWAP) to minimize tracking error. But near expiration, may sell the remaining Bitcoin, causing the price to drop, leaving the short position in the futures to close “with a handsome profit.”
Of course, this effect isn’t enough to cause the market to plummet on its own. Lee also explains that inflows into cryptocurrency in 2018 have been insufficient. Lee explains there’s been more net supply this year amid initial coin offerings, mining rewards, and capital gains taxes. Absorption, meanwhile, has been hampered by slow progress on creating institutional tools.
In more straightforward terms, bitcoin’s price has slumped in the 10 days leading up to every bitcoin futures expiration. We just went through another expiration on June 13. Based on trends, the price of bitcoin slumps leading up to the expiration, then gains in the six days following expiration.
Ultimately, the bitcoin community exploded with growth when bitcoin futures were first announced back in December 2017. Within weeks of the launch of bitcoin futures, bitcoin had surged to an all-time high price near $20,000. Six months later, we’re witnessing the downside of bitcoin futures: prices are slumping before every futures expiration date. Now, it’s time to wait and see if prices recover in the next six days as Lee predicts.