The Federal Reserve Bank of San Francisco said the launch of Bitcoin futures trading was the cause of the fall in price of Bitcoin (BTC) from the peak of nearly $20,000 in December 2017.
In an Economic Letter released on Monday, the bank said the peak price of BTC coincided with the introduction of bitcoin futures trading on the Chicago Mercantile Exchange (CME), and the price of BTC began dropping as pessimistic investors were allowed to bet.
This is seen by the bank as being consistent with trading behavior that typically accompanies the introduction of futures markets for an asset.
The price of BTC had remained under $1,150 from its inception in 2009 until February 22, 2017 and under $4,000 through mid-2017. It climbed significantly from mid-2017 to a peak price of $19,511, but started rapidly descending from mid-December 2017.
Until December 2017, speculative demand for BTC came only from optimists, which pushed the price of BTC up, energizing more people to join in and keep pushing up the price.
However, the entry of pessimists when the futures for bitcoin started trading on the CME on December 17, 2017 led to the decline in BTC prices.
The offers of future bitcoin deliveries at a lower price saw the order flow putting downward pressure on the spot price as well. The new investment opportunity led to a fall in demand in the spot bitcoin market and therefore a drop in price.
As of late April, the bitcoin price had not returned to its pre-futures peak of $19,511. At 9.54 am ET on Tuesday, Bitcoin was down 1.63 percent at $9,113.01 on Coinbase.
The research note says the official recognition and regulatory acceptance of bitcoin as a means of payments would increase its circulation and price, while regulatory constraints or introduction of transaction fees may reduce it.
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