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

Patrick Augustin, Alexey Rubtsov and Donghwa Shin

No 41, LawFin Working Paper Series from Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin)

Abstract: 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.

Keywords: bitcoin; blockchain; cryptocurrencies; derivatives; fintech; regulation (search for similar items in EconPapers)
JEL-codes: G12 G13 G14 O33 Y80 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-mst and nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:lawfin:41

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