In this article, we’ll look at whether there are any expiration-day effects related to BTC-USD and the CME expiry.

Firstly, are weekly/daily returns significantly different up to expiration days as compared to non-settlement days?

Secondly, given that volume and price changes are closely associated, it will also be interesting to see if there any effects on trading volume during expiration days.

Finally, we’ll also investigate the volatility effect. Intra-day level data (4-hour) from Bitstamp is also used to uncover any expiration-day effects that may not be visible in the higher timeframe data.

What are Expiration-day Effects?

Expiration-day effects have been studied in the literature on traditional financial markets and have been found to be present across various stock markets.

Expiration-day effects typically refer to three things:

An increase in trading volume of the underlying asset on expiration day, An increase in price volatility on expiration day, and Price reversals after expiration day.

These effects are known to vary across time and markets. One explanation for expiration-day effects observed in traditional markets is the unwinding of cash positions by arbitrageurs in cash markets. Suppose many arbitrageurs unwind their positions in the same direction and the unwinding is not anticipated, it can lead to an unexpected imbalance in orders and consequently impact the price of the asset.

Speculators are another source of expiration-day effects. As explained above, the bitcoin futures contract final price is calculated using exchanges included as part of the CME’s Bitcoin Reference Rate. Speculators may try to manipulate the price in order to settle the contract at a price favourable to their position.

Suppose a trader is short on a CME bitcoin futures contract. They could sell bitcoin on spot exchanges to depress the price action. Once the futures are settled, the reference rate takes prices from the Bitwise 10 exchanges. The trader could sell BTCs on one (or many) of these exchanges to influence the price of the index. The more they can push the price down before expiry, the more money they will make on their short position on the CME bitcoin contract.

There are some claims that the timing of the introduction of CME futures was specifically aimed at popping the bitcoin bubble during the crypto-mania in late 2017. There have also been reports of abnormal losses in the days leading up to the CME expiry, hinting at (but not definitively proving) manipulation by institutional traders.

The cryptocurrency market is not as efficient or deep as traditional markets. Consequently, there is potential for powerful market players to manipulate the price of the CME bitcoin futures contract as it leads into expiry and market speculation regarding future contracts on a spot market may be successful.

Impact on Bitcoin Returns

How are bitcoin returns affected on expiration day as compared to non-expiration days/Fridays? Are there significant reversals on the day after expiration day?

In this part of the investigation, we’ll look at weekly, daily and intraday returns. For intraday returns, we examine the 24-hour, 48-hour and 72-hour returns for both pre- and post-expiration.

With these analyses, we complement previous research which looked at bitcoin returns 40 hours until expiration while also including more observations (from 01/01/2018 to April 2020).

First, we’ll look at daily level data to see if there are any differences in returns on expiration days as compared to non-expiration days (and non-expiration Fridays, since most of the time the CME bitcoin futures contract is terminated on a Friday).

The chart below shows the average daily return for bitcoin on the day of expiration, non-expiration Fridays and any day that is not the last day of trading for the CME futures contract.