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

  • Patrick Augustin
  • Alexey Rubtsov
  • Donghwa Shin
illustration of bitcoin in a matrix


Hailed as “one of the most powerful innovations in Finance in 500 years”, there now exist more than 2,000 cryptocurrencies with total market capitalization of more than $200 billion USD. Furthermore, according to industry research, total cryptocurrency derivatives trading volume in futures, options, and swaps surpassed $3 trillion USD. The central question that we study in this research is whether the introduction of cryptocurrency derivatives is beneficial or detrimental to the underlying cryptocurrency spot markets.

The answer to that question is not obvious. On the one hand, derivatives could be used as a substitute for spot markets and, therefore, lower their informational efficiency due to a reduction of spot trading activity. On the other hand, derivatives could complement spot markets and make them more efficient and informative, because they can provide the ability to hedge spot price fluctuations. In this respect, empirical evidence from other asset classes (e.g., equities or commodities) is far from conclusive. More importantly, however, this question is critical in the context of ongoing discussion among regulators, who actively debate whether to allow new cryptocurrency investment products. For example, in the United States, the Securities and Exchange Commission has persistently rejected applications for the listing of bitcoin exchange traded funds.

To shed light on our question, we exploit the introduction of bitcoin futures on the Chicago Mercantile Exchange and the Chicago Board of Options Exchange in December 2017. This event is particularly well suited for our analysis, because the futures contract was only introduced on bitcoin against the U.S. dollar (BTC-USD), and not on any other bitcoin-fiat currency pair. Moreover, fully fungible (i.e., mutually interchangeable) BTC-USD assets trade on multiple exchanges. By comparing the dynamics of BTC-USD relative to other bitcoin-fiat pairs (e.g., BTC-CAD) traded on the same exchange, these features allow us to identify whether the introduction of the bitcoin futures was beneficial or detrimental to the bitcoin spot market.

In our study, we examine 10 bitcoin-fiat currency exchange rates traded on 14 different online platforms (i.e., exchanges). We provide formal evidence on how the bitcoin futures introduction impacted the following characteristics of the underlying bitcoin spot market:

• Price synchronicity. We evaluate correlation of bitcoin prices across different exchanges. Low correlation would indicate a frequent mismatch of prices on different exchanges.
• Price integration. This measure counts the number of times when prices on different exchanges move in the same direction. High value of this measure indicates better price alignment.
• Price efficiency. Here we identify how quickly new market-wide information is incorporated into prices.
• Market quality. This characteristic reflects the accuracy of prices in the sense that it captures how often bitcoin prices deviate from their efficient level.
• Market liquidity. For this characteristic, we assess the liquidity of the market in terms of price impact, trading volume, and bid-ask spreads.

Our findings suggest that there is 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 cross-exchange 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 spot market by making the underlying prices more informative.