When bitcoin futures launched late last year as products on major exchanges in the United States, it felt like a pivotal moment. The cryptocurrency had always been hailed by those rebellious enough to live outside the established financial order. But now, it would be packaged in a more conventional manner for a larger and more institutionalized audience.
At the time of launch, we didn’t know what we didn’t know. No one could really say what effect futures might have on the larger bitcoin market, if any.
Now that we have six months of data since bitcoin futures were launched by Cboe, we can see that those same products might be delivering a pivotal moment each and every month for bitcoin traders.
Futures products, specifically XBT futures from Cboe, might be having more significant of an impact on the market price than we could have anticipated at launch.
In the run up to contract expiration for monthly bitcoin futures, bitcoin prices have plummeted over the three days before contracts expired, bottomed at expiration, and then recovered over the next few days.
XBT futures always close on the Wednesday before the third Friday of each month.
Looking at a 3 day window before the expiration of the first contract in January, bitcoin dropped by more than 30%. Below is a chart showing market action heading into and out of the first contract expiration. In general, the pattern is a sideways grind in the few days before the three day window, a steep drop in the three days before expiration, and then a bounce and recovery in the days following.
chart built by Jason Pfaff in TradingView
For five of the six months there has been an expiration, we have seen a similar pattern play out. The one exception was February, where price rose into the expiration day. There are several theories about the trading action that cascaded through Febuary that accounts for several anomolies seen that month, inluding heavy tax related buying and selling. However, even in February we saw the trend move up following expiration on Wednesday. The contract expiration on Wednesday has been followed by at least two up days, and often more, in every month since futures were launched, without exception.
The most recent contract expiration shows this trend has not abated. In the three days heading into the last expiration on June 13th, price dropped around 20% after grinding sideways for several days.
chart built by Jason Pfaff in TradingView
If you compare the June chart to the previous January chart, the shape looks eerily similar.
So, is this emerging pattern a coincidence? Or is there something at work causing price to drop into XBT contract settlement day?
All we can see in the data is the general framework of a correlation. There simply is not enough specific data at this point to prove causation.
However, if a trader was both long a significant amount of bitcoin and short the futures, you could propose that theoretically they might benefit if they were to unload large positions on the market, which could cause price to move lower, and benefit a short position in the futures. Whether or not that is actually happening is impossible to say without more data.
Stepping back more broadly though, we can clearly see a trend through 2018 where price moves sharply lower in the early part of the third week of the month, only to start to modestly recover after the mid-month Wednesday. In each settlement week so far, we have been higher on Friday than we were on Wednesday.
To say that we have seen that same pattern now six months in a row is striking.
chart built by Jason Pfaff
In a market as new as crypto, it’s important we continue to look for emerging patterns and trends to determine the unique aspects of such a dynamic trading landscape even though we know it will take more work and research to begin to fully understand each variable. We are still in the very early innings of a very long ballgame that is sure to produce wild swings, back and forth.
What we can see after we study the effects of six months of trading crypto futures is there is a clear pattern of price dropping heading into expiration, only to begin a recovery phase in the days after.
However, knowing exactly why might take a little bit more time.