I have been studying the impact of futures on cash markets for decades, so I was very interested in the new short piece of research, “How Futures Trading Changed Bitcoin Prices” FRBSF Economic Letter 2018-12 May 7, 2018 that was published this week.

I have been watching the development of bitcoins, but I don’t partake in bitcoin trading. If pushed into a corner for an opinion, I would say that bitcoin trading is excessive and overly speculative. Bitcoins as a concept may have exceeded its reality.  It also may be too early to have trading of a derivative on this cash market with many outstanding questions on how to best run this market.

Nevertheless, now that futures trading has begun, we should study how the bitcoin cash market may or should change. This recent research, however, is a good poster piece on the fact that correlation many not mean causality. Bitcoin prices have fallen since the inception of futures trading, but that does not imply that futures were the cause. It could be, but it has not been truly tested. If careful research is not done on this topic, then emotional biases will drive the discussion and not facts.

The authors show no understanding of the role that futures markets have played in increasing the efficiency of cash markets. More importantly, they have no sense of the rich research history on the impact of futures on cash markets. There is little structural discussion on the role of futures to complete markets when there are high costs for shorting or trading in general. Nor was there extensive discussion on the role of price discovery through futures markets with the authors only paying lip service to recent work on financial innovation.

Perhaps more research is pending but there is little evidence to make any strong judgments on the value of futures trading to control the excessive prices seen in bitcoins. There is a need to understand the impact of futures on a fragmented cash market where the pricing is based off a reference index which may not be inclusive of all trading.

Futures have proven in most markets tested to increase market efficiency, dampen volatility, and improve market transparency. There are clear structural and regulatory advantages from having trade done on a transparent exchange.

Futures play a significant role in the financial system and not fully defining, reviewing, and testing of how this role is played is a disservice to the futures markets and all those who rely on the Fed to provide useful information and research on any policy debate.