Bitcoin Futures—What use are they?

Abstract

Early analysis of Bitcoin concluded that it did not meet the economic conditions to be classified as a currency. Since this conclusion, interest in Bitcoin has increased substantially. We investigate whether the introduction of futures trading in Bitcoin is able to resolve the issues that stopped Bitcoin from being considered a currency. Our analysis shows that spot volatility has increased following the appearance of futures contracts, that futures contracts are not an effective hedging instrument, and that price discovery is driven by uninformed investors in the spot market. We therefore argue that the conclusion that Bitcoin is a speculative asset rather than a currency is not altered by the introduction of futures trading.

BitMEX bitcoin derivatives: Price discovery, informational efficiency, and hedging effectiveness

“…But that is because the size of those contracts is so large that position risk is high, except when hedging huge notional amounts. Our findings about the price discovery also form a clear contrast to Corbet et al () and Baur and Dimpfl () who also document that bitcoin spot prices lead the bitcoin futures prices in CME and CBOE. However, their results are likely to have been influenced by low trading volumes on the futures contracts (Adämmer, Bohl, & Gross, ).…”

“…The HE varies across the spot exchanges and hedging methods, but the magnitude is always large. This finding is opposite to Corbet et al (2018), who report that a hedge using CBOE futures does not effectively reduce the portfolio return volatility. Their findings show that hedging increases, rather than decreases, the variance of the hedge portfolio returns not only for the naive hedging but also for the minimum variance hedging.…”

The determinants of price discovery on bitcoin markets

“…For example, BTCQ8 exhibits an average proportion of 96.65%, indicating that there is almost no trading in other contracts at that time. This strong shift in liquidity between futures contracts may favor previous empirical results of spot-driven price discovery (see, e.g., Baur & Dimpfl, 2019;Corbet et al, 2018) when futures contracts are considered over their whole life span.…”

“…Cryptocurrencies and especially bitcoin have received increasing attention in the academic finance literature in recent years. Much of this study focuses on issues such as long‐ and short‐term determinants of the exchange value of bitcoin (e.g., Kristoufek, 2015; Li & Wang, 2017; Mai, Shan, Bai, Wang, & Chiang, 2018), the market efficiency of bitcoin (e.g., Köchling, Müller, & Posch, 2019; Urquhart, 2016), the diversification effects and connectedness of bitcoin with other financial assets (e.g., Bouri, Jalkh, Molnár, & Rouband, 2017; Brière, Oosterlinck, & Szafarz, 2015; Corbet, Lucey, Peat, & Vigne, 2018; Dyhrberg, 2016), illegal activities (e.g., Foley, Karlsen, & Putniņš, 2019), or the price discovery process among bitcoin trading venues (e.g., Brandvold, Molnár, Vagstad, & Valstad, 2015; Pagnottoni & Dimpfl, 2019).…”

“…The first question has been the focus of three recent studies. Corbet et al (2018), and Baur and Dimpfl (2019) explore price discovery leadership using high‐frequency transaction data and find that the spot market incorporates information into prices first and thus dominates in terms of price discovery. In contrast, using daily data, Kapar and Olmo (2019) find that the futures market is the price discovery leader.…”