According to a research report published by the San Francisco Federal Reserve the decline of Bitcoin (BTC) after it reached a record high of close to $20,000 was related to the rolling out of a futures market for the cryptocurrency. The record prices of bitcoin were actually in alignment with the introduction of bitcoin futures on the Chicago Mercantile Exchange on December 17, 2017. A futures market had also been opened on the Chicago Board Options Exchange a week earlier though trading was thin.
“The rapid run-up and subsequent fall in the price after the introduction of futures does not appear to be a coincidence. It is consistent with trading behavior that typically accompanies the introduction of futures markets for an asset,” wrote four researchers in the latest Economic Letter by the regional Fed bank.
Prior to the introduction of futures it was not possible to short bitcoin or bet on the fall in its price. For some time optimistic investors were able to bid up the virtual currency seeing it appreciate by over 1,300% last year before the pessimists entered the market and consequently reversing the direction of the market.
According to the researchers the price reaction of bitcoin was like that of mortgage-backed securities which were also driven by the same forces of both pessimistic and optimistic traders. The researchers also explained that the reason the price collapse did not happen overnight was because of a lack of desire to enter positions in the market so soon after trading had been launched.
Per the researchers the price of bitcoin as well as demand for the virtual currency hinges on acceptance from the traditional financial institutions as well as regulatory acceptance and official recognition. The researchers however warned that in the event that a competing virtual currency gained wider use the price of bitcoin could drop precipitously since these kinds of markets are winner-takes-all.
Additionally the long-term price of the world?s biggest digital currency by market capitalization will depend on what level of awareness it is able to achieve across the globe as a method of payment.
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