New speculation from the Federal Reserve Bank of San Francisco is proposing that the decline in the price of Bitcoin, from its December 2017 high of nearly $20,000, was in fact caused by the release of Bitcoin futures. This study claims that it cannot be a coincidence that the price of Bitcoin started its decline as the Chicago Mercantile Exchange introduced Bitcoin futures. These claims come as Bitcoin has seemingly started increasing in price again after a long slide starting in mid-December.

The Federal Reserve Bank of San Francisco released these claims in an open economic letter. It starts with a brief summary of the history of Bitcoin and noted that from 2009 up until the middle of 2017 the price of Bitcoin stayed below $4,000. The economic letter also noted that despite the fact that Bitcoin is regarded as a digital currency, it did not correspond to traditional market dynamics and fluctuations. Rather, Bitcoin experienced explosive growth during all of 2017, while the stock index of Standard and Poor’s 500 only saw a relatively modest increase.

Moreover, the letter proposes that the introduction of Bitcoin futures can be likened to the rise and subsequent fall of the American home financing market around a decade ago. The letter went on to argue that the main driver for Bitcoin growth was, in fact, investors who believed that the price would continue to rise. As the cryptocurrency saw an almost atmospheric rise during 2017, more investors flocked to the currency to participate in the growth.

Furthermore, the letter mentions that whilst optimistic investors were quick to invest in Bitcoin, there were no readily available tools for pessimistic investors to use in shorting Bitcoin. However, this all changed as Bitcoin futures were introduced. According to the authors of the letter, the Bitcoin futures allowed pessimistic investors to put their money where their mouths were at, which led to a ”reversal of the Bitcoin price dynamics”.

The letter goes on to argue that the comparatively small volume of Bitcoin future trades was the main reason as to why the Bitcoin price did not immediately crash. However, it also notes that there is still significant room for growth in the cryptocurrency sector and that other cryptocurrencies than Bitcoin may yet take the role as the main cryptocurrency. Nonetheless, this letter comes at a time when some are arguing that Bitcoin is in the middle of returning to more sustainable, long-term growth. It is also unclear whether the introduction of Bitcoin futures was the sole reason for the decline from Bitcoin’s mid-December all-time high – although the Federal Reserve Bank of San Francisco certainly makes a compelling argument in their letter.

Image Source: “Flickr”