Price discovery in bitcoin spot or futures?

Abstract

In December 2017, both the Chicago Board Options Exchange and the Chicago Mercantile Exchange introduced futures contracts on bitcoin. We investigate to what extent they provide useful information for the price discovery of bitcoin. We rely on the information share methodology of Hasbrouck ( , J Finance, 50, pp. 1175( -1199 and Gonzalo and Granger (1995, J Bus Econ Stat, 13, pp. 27-35) and find that the spot price leads the futures price. We attribute this result to the higher trading volume and the longer trading hours of the globally distributed bitcoin spot market, compared to the relatively restricted access to the US-based futures markets.

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

“…Finally, we show that BitMEX derivatives serve as an effective hedge against spot market with the outof-sample hedging effectiveness (HE) between 0.9642 (for the naive hedge of the Kraken price) and 0.9939 (for the minimum variance hedge of Coinbase). These findings are in complete contrast to the conclusions of Corbet et al (2018) and Baur and Dimpfl (2019), who use the CME and CBOE bitcoin futures as the hedging contract.…”

“…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 (2018) and Baur and Dimpfl (2019) 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, 2016).…”

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.…”

“…Trading in expiring futures contracts terminates at 4 p.m. London time on the expiration day. The trading hours for CME futures contracts are between 5 p.m. and 4 p.m. Chicago time (CT) from Sunday to Friday with a 60-min break each day beginning at 4 p.m. CT. 7 We follow Baur and Dimpfl (2019) and select the BTSP spot as the spot price (we do not use the daily available BRR nor its continuous version (Bitcoin Realtime Index-BRTI) because investors cannot trade these indices). BTSP is one of the largest cryptocurrency spot trading platforms, where bitcoin can be traded against USD (RIC: BTC = BTSP).…”

“…The results show that price discovery on bitcoin markets is affected by news-based investor sentiment rather than by investor attention and macroeconomic news. Baur and Dimpfl (2019) point out that the analysis of bitcoin price discovery may be somewhat different from other asset classes. Given the absence of a bitcoin pricing model, the ambiguity to which asset class the bitcoin even belongs, 5 as well as the different design of spot (unregulated) and futures markets (regulated), one cannot expect that the results of other asset classes also hold for the bitcoin market ex ante.…”