Bitcoin Plunge from $20K Due to Futures, Says Fed

Bitcoin’s dramatic plunge from near $20,000 per U.S. dollar was linked to the launch of the futures market that allowed investors to short the digital currency, according to a report from the San Francisco Federal Reserve.

"The rapid run-up and subsequent fall in the price after the introduction of futures does not appear to be a coincidence," researchers said in the regional Fed bank's latest Economic Letter. "It is consistent with trading behavior that typically accompanies the introduction of futures markets for an asset."

Bitcoin reached near $20,000 in mid-December after remaining under $4,000 for about the first half of 2017. But when the Chicago Mercantile Exchange (CME) launched futures trading on bitcoin on Dec. 17, bitcoin hit a high of $19,783 on that day before seeing its value tumble. (See also: CME to Launch Bitcoin Futures.)

Bitcoin’s price then fell to below $7,000 before rebounding a bit back toward $10,000 the past month. The digital currency faced setbacks in recent days after legendary investor Warren Buffett said it was “probably rat poison squared.” But, still, Wall Street firms like Goldman Sachs are warming to trading bitcoin. (See also: How Goldman’s Bitcoin Could Change Industry.)

Futures Markets Give Skeptics a Financial Option

The futures market actually opened a week before bitcoin’s all-time high. The Chicago Board Options Exchange (CBOE) launched a similar market, but the trading on it saw smaller volumes, according to the San Francisco Fed’s letter.

Before the futures market opened to bitcoin, investors who were pessimistic about the future of bitcoin had no way to gain financially from a decline. So, only optimism was priced into the value of bitcoin, pushing the price higher on speculative demand. But, the futures markets allowed those bitcoin skeptics to find a financial way to benefit.

Investing in cryptocurrencies and Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns no bitcoin.

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