Bitcoin
Study finds CME drives Bitcoin price, but it excludes stablecoin volumes
On Oct. 14, Wilshire Phoenix investment firm released its Efficient Price Discovery report, which detailed how CME Bitcoin (BTC) futures impact Bitcoin price discovery.
The firm concluded that “CME Bitcoin futures contribute more to price discovery than its related spot markets.” And the researchers also suggested that:
“CME Bitcoin futures have grown to become significant, this is not only demonstrated through trading volume and open interest, but also by influence on spot price formation.”
Wilshire’s analysis correctly states that price discovery in traditional markets is a contested topic. The report also adds that studies on price formation often find that the futures markets lead most of the time, but this doesn’t mean their conclusions about CME Bitcoin futures are absolute.
According to the report, CME Group, the leading derivatives venue, trades $5.15 trillion per day across its multiple markets. According to Nasdaq data, this number compares to the $430 billion in daily volume seen in the U.S. stock market.
This data shows that the trend of derivatives volumes surpassing spot exchanges by tenfold is the norm rather than an exception.
The CME index is missing key ‘ingredients’
U.S. Securities and Exchange (SEC) documents show that In June, Wilshire Phoenix filed for a publicly tradable Bitcoin-backed fund similar to the Grayscale Bitcoin Trust.
It is important to note that the Bitcoin held by Wilshire’s fund will follow a BTC price index called the Bitcoin Reference Rate (BRR) listed by the CME.
In the report, Wilshire Phoenix explained that the CME Bitcoin Reference Rate (BRR) is used to determine the price on which BTC futures contracts are cash-settled in U.S. dollars.
For CME and aspirant funds based in the U.S., it might make sense to exclude stablecoin volumes and focus on more regulated exchanges. Even if Bitcoin price discovery does not happen there, arbitrage efficiency has grown over the years, according to a 2019 Bitwise Investments report.
Analysis from Bitwise found that “arbitrage between these ten exchanges is virtually perfect.” Therefore, by not having sustained price discrepancies, the CME reference index can comfortably select a handful of exchanges, excluding the top three.
Although the latest Bitwise Bitcoin ETF proposal has been withdrawn, its price formation was different from its competitors. Using a broader base, it also included stablecoin based exchanges.
Those familiar with cryptocurrency markets will know that stablecoin market caps, trading volumes, altcoin pairings, and their impact on the crypto market have increased immensely over the past two years.
Not only has the stablecoin market capitalization risen eightfold to $21 billion in the past two years, but the dominance of stablecoin pairs and their trading volumes have also grown significantly.
Take notice of how the top Bitcoin pairs are Tether (USDT) based. Even more worrisome is that the CME excludes the three leading exchanges from the Bitcoin Reference Rate.
The above data leads to a significant difference in exchanges’ selection from more inclusive indexes such as Bitwise’s ‘Real Bitcoin Trade Volume’, Messari’s ‘Real Volume’, and Nomics ‘Transparent Volume’. Regardless of the reasons behind CME’s exchange selection, its BRR index excludes the top three exchanges, according to Messari’s 24-hour data.
Stablecoin impact on price formation has not been tested
Wilshire Phoenix’s report is a step in the right direction, and the study has an impeccable methodology. There is enough evidence to support their conclusion that the CME Bitcoin futures lead price formation compared to regulated USD fiat exchanges.
Although well-executed, the analysis does not disprove that Bitcoin price formation happens on Binance, Bitfinex, Huobi, or OKEx. Institutional investors, principally those based in the U.S., may not be interested in less regulated exchange volumes or Bitcoin pricing in stablecoins, but that does not mean those are irrelevant for the price formation.
As for the retail investor, using a broader set of exchanges and pricing makes more sense to test price discovery for an asset like Bitcoin. This conclusion is not equivalent to stating that CME’s Bitcoin Reference Rate is wrong or easily manipulated.
Are less-regulated exchanges inflating volumes by using market makers and large clients paying barely zero fees? Is Tether’s volatility too high to even consider when attempting to determine whether it impacts Bitcoin price formation in USD? These are all valid questions that warrant further discussion and investigation.
Therefore, a broader evaluation is necessary before concluding whether CME Bitcoin futures have the highest contribution to price discovery.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.
- Bitcoin has seen some mixed price action as of late, with bulls being unable to take control of its trend in the time following its rally up to $28,500
- The rejection here was quite intense, and it has yet to show any signs of strength in the time following this occurrence
- The fact that bulls have guarded against any deeper drawback is positive because it invalidates the possibility that this recent high is a blow-off top
- One trader is now noting that there is an incredibly bullish indicator that is flashing for Bitcoin
- He points to the cryptocurrency’s monthly RSI, noting that a monthly close above a specific level that it is nearing is historically followed by parabolic moves higher
- In the past, these movements have had an average return of 1,010%, but their size and length seem to diminish with time
Bitcoin and the entire crypto market have declined over the past 12 hours, which appears to be the direct result of the pressure that XRP is placing on the market due to its latest selloff.
Where the market trends in the mid-term likely won’t depend on XRP, which means that this latest round of selling pressure may mark a knee-jerk reaction from investors.
One analyst is noting that Bitcoin’s monthly RSI is flashing an incredibly bullish sign for where BTC trends next.
Bitcoin Struggles to Gain Momentum Following $28,500 Rejection
At the time of writing, Bitcoin is trading down just over 1% at its current price of $26,700.
The crypto has been trading between the upper-$26,000 region and the lower-$27,000 region throughout the past few days.
It has yet to garner enough buy-side support to break above the heavy resistance laced throughout the lower-$28,000 region. For now, this peak could mark a blow-off top.
Indicator Suggests BTC is About to Go Parabolic
One trader explained in a recent tweet that Bitcoin could be on the cusp of seeing a parabolic move higher in the days and weeks ahead.
He points to the cryptocurrency’s monthly RSI as an indicator for this possibility.
“BTC – Monthly RSI. Monthly candle is about to close above 80. When this happens, bullish trend continues, with an avg. return of 1010.87%. Each cycle is shorter.”
Image Courtesy of il Capo of Crypto. Source: BTCUSD on TradingView.
The coming few days should shed light on Bitcoin’s trend, as continued weakness could confirm $28,500 as a local high and lead to a deeper retrace.
Featured image from Unsplash. Charts from TradingView.
Bitcoin has had an explosive breakout year as a maturing financial asset,. The cryptocurrency is finally being considered by institutional investors for the first time, during a year that will go down in history for unprecedented money printing.
The asset’s hardcoded digital scarcity is a primary driver of its boom and bust cycles, and in the year following each block reward halving, magic happens. With the new year right around the corner, here’s a look back at past crypto market cycles for a glimpse at what to expect from Bitcoin in 2021.
Looking Back At Historical Bitcoin Market Cycles
All markets are cyclical and go through distinct phases of bear and bull trends. These cycles can take place over the course of decades, or a handful of years. In crypto, cycles often move faster than traditional assets due to the always-on, 24/7 market.
But because Bitcoin is just over a decade old, there are only a couple of boom and bust cycles at which to glean any useable data. In technical terms, when Bitcoin breaks its former all-time high, the new bull market is on.
Fundamentally, this occurs every four years following the asset’s block reward halving. This built-in mechanism slashes the supply of BTC in half at a time when demand is beginning to resume.
RELATED READING | NY TIMES BESTSELLING AUTHOR: BITCOIN S2F IS FLAWED, NOT MATHEMATICALLY SOUND
The combined effect of suddenly diminished supply and growing demand throws buying and selling equilibrium so out of balance that price appreciates exponentially.
2020 has acted as the ideal example of the impact each halving can have on the market. Bitcoin went from “a fad” to full-blown FOMO in less than nine months, all because supply and demand is so favorable to positive ROI.
And while 2020 was definitely a breakout year for a bullish Bitcoin, it is next year that will make a new wave of Bitcoin billionaires.
Halving years are marked in blue. In the year following, the cryptocurrency goes full parabolic | Source: BLX on TradingView.com
Move Over 2020, Why 2021 Will Be The Cryptocurrency’s Best Year Yet
Glancing at the chart above and it’s shocking to see just how high Bitcoin has climbed in twelve years. During the twelve years of trading, the cryptocurrency has had three distinct halvings, cutting the reward miners receive from 50 to 25 BTC, then from 25 to 12.5 BTC, to the current 6.25 BTC.
Each time this happens, demand begins to so drastically outweigh the limited supply, the asset goes parabolic and rises exponentially.
RELATED READING | BITCOIN BULL RUN IS OFFICIAL ACCORDING TO MONTHLY RSI, MORE BULLISH THAN 2017
In the two post-halving years on record, the first resulted in well over 6,000% ROI and the second just under 2,000% ROI. What could 2021 bring crypto investors?
Another 2,000-6,000% return isn’t likely simply due to the law of diminishing returns, however, even a 400% increase from current levels would result in a price of $125,000 per BTC.
Featured image from Deposit Photos, Charts from TradingView.com
If History Rhymes, This Indicator Suggests Bitcoin May See a Parabolic Explosion
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