The Impact of Derivatives on Cash Markets: Evidence From the Introduction of Bitcoin Futures Contracts

Abstract

We exploit a unique feature of cryptocurrency markets to provide new evidence on how derivatives impact cash markets. In December 2017, the CME Group and CBOE Global Markets both introduced futures contracts on bitcoin (BTC) against USD, but not on any other cryptocurrency exchange rate pairs. Because identical cryptocurrencies trade on multiple exchanges, we can examine how the introduction of bitcoin futures changed various attributes of BTC-USD relative to other cryptocurrency pairs, keeping exchange characteristics constant. Following the futures introduction, we find a significant increase in cross-exchange BTC-USD price synchronicity relative to other exchange rate pairs, as demonstrated by an increase in price correlations and a reduction in arbitrage opportunities. We also find evidence in support of an increase in market efficiency and market quality. There is suggestive evidence of increasing market liquidity, although these results are weaker. Overall, our analysis supports the view that the introduction of BTC-USD futures was beneficial to the bitcoin cash market by making the underlying prices more informative.

Keywords: Bitcoin, Block-chain, Cryptocurrencies, Derivatives, FinTech, Regulation

JEL Classification: C1, C2, G12, G13, G14, O33, Y80