The impact of derivatives on spot markets: Evidence from the introduction of bitcoin futures contracts

  • Cryptocurrencies provide a unique opportunity to identify how derivatives impact spot markets. They are fully fungible, trade across multiple spot exchanges at different prices, and futures contracts were selectively introduced on bitcoin (BTC) exchange rates against the USD in December 2017. Following the futures introduction, we find a significantly greater increase in cross-exchange price synchronicity for BTC--USD relative to other exchange rate pairs, as demonstrated by an increase in price correlations and a reduction in arbitrage opportunities and volatility. We also find support for an increase in price efficiency, market quality, and liquidity. The evidence suggests that futures contracts allowed investors to circumvent trading frictions associated with short sale constraints, arbitrage risk associated with block confirmation time, and market segmentation. Overall, our analysis supports the view that the introduction of BTC--USD futures was beneficial to the bitcoin spot market by making the underlying prices more informative.

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Author:Patrick AugustinORCiD, Alexey RubtsovORCiD, Donghwa ShinORCiDGND
Parent Title (English):LawFin working paper ; No. 41
Series (Serial Number):LawFin Working Paper (41)
Publisher:Center for Advanced Studies on the Foundations of Law and Finance, House of Finance, Goethe University
Place of publication:Frankfurt am Main
Document Type:Working Paper
Year of Completion:2022
Year of first Publication:2022
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2022/07/21
Tag:bitcoin; blockchain; cryptocurrencies; derivatives; fintech; regulation
Issue:This draft: June 30, 2022
Page Number:51
The paper has benefited significantly from a fellow visit of Augustin at the Center for Advanced Studies Foundations of Law and Finance funded by the German Research Foundation (Deutsche Forschungsgemeinschaft, DFG) - project FOR 2774.
Institutes:Rechtswissenschaft / Rechtswissenschaft
Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF)
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Wissenschaftliche Zentren und koordinierte Programme / DFG-Forschergruppen / Foundation of Law and Finance
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
3 Sozialwissenschaften / 34 Recht / 340 Recht
Licence (German):License LogoDeutsches Urheberrecht