The Federal Reserve Bank of San Francisco (FRBSF) has published an analytical research that ties drop of Bitcoin () prices to the beginning of bitcoin futures trading on Chicago Mercantile Exchange (CME).
“We suggest that the rapid rise of the price of bitcoin and its decline following issuance of futures on the CME is consistent with pricing dynamics suggested elsewhere in financial theory and with previously observed trading behavior. Namely, optimists bid up the price before financial instruments are available to short the market. Once derivatives markets become sufficiently deep, short-selling pressure from pessimists leads to a sharp decline in value.”- FRBSF Analysts are saying in their letter.
In the beginning Bitcoin prices depended on speculative demand, which is similar to keeping gold under your pillow hoping its value would grow. Bitcoin price kept going up while investors and optimists were willing to bet on it. Pessimists however weren’t joining. Up until December 2017 Bitcoin was used as Nakamoto has envisioned, without interference of any other institution.
Then came December 2017 when Bitcoin started trading on CME. Bitcoin futures entered the market meaning it was now possible to buy or sell bitcoin on a future date with a predetermined price. Pessimists also joined the bitcoin market and were able to bet on a lower price, speculatively making the prices decrease, FRBSF argues.
Bitcoin price dynamics depend on more than optimists, peer-to-peer transactions or mining volume. There are also manipulations by financial institutions, government bans and incentives, technology adaptations and a growing number of regulations. A mix of different factors triggers volatility of Bitcoin’s price.
There are many speculations regarding the future of Bitcoin price which is literally the One Million Dollar Question of our age.