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

Author

Listed:
  • Augustin, Patrick
  • Rubtsov, Alexey
  • Shin, Donghwa

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.

Suggested Citation

  • Augustin, Patrick & Rubtsov, Alexey & Shin, Donghwa, 2022. "The impact of derivatives on spot markets: Evidence from the introduction of bitcoin futures contracts," LawFin Working Paper Series 41, Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin).
    • Handle: RePEc:zbw:lawfin:41
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    References listed on IDEAS

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    Cited by:

    1. Bouteska, Ahmed & Harasheh, Murad, 2023. "Bitcoin volatility and the introduction of bitcoin futures: A portfolio construction approach," Finance Research Letters, Elsevier, vol. 57(C).

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    More about this item

    Keywords

    bitcoin; blockchain; cryptocurrencies; derivatives; fintech; regulation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • Y80 - Miscellaneous Categories - - Related Disciplines - - - Related Disciplines

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