Abstract
The emerging interest in Bitcoin futures market has led to questions on its trading form and contribution to risk minimization. These questions are important for market participants, including hedgers and speculators. This paper addresses the possible trading motive in Bitcoin futures market in being speculation or hedging. The author first tests a model relating Bitcoin futures returns with trading volume and conditional volatility, estimated with a GJR-GARCH specification, on a full sample of daily futures prices. A robustness check is then conducted by investigating the hedging effectiveness of Bitcoin futures and the speculation-hedging ratios on individual Bitcoin futures contracts. The estimation results on Bitcoin futures contracts, spanning from December 2017 to February 2020, show a significant positive relationship between futures returns and lagged volume. The speculation-hedging measures used for Bitcoin futures contracts maturing in March, June, September, and December reveal an increasing demand for speculation. Also, the Bitcoin spot’s full-hedge and OLS-hedge strategies with Bitcoin futures provide no gain over a no-hedge strategy. The results reveal strong evidence that traders in the Bitcoin futures market are motivated by speculation rather than hedging. This further puts in evidence the existence of asymmetric information within informed traders in Bitcoin futures market, and therefore market participants would not insure their positions against Bitcoin price movements.
Highlights
It has been more than two years since cash-settled Bitcoin futures contracts were provided by the Chicago Mercantile Exchange (CME)
The results reveal strong evidence that traders in the Bitcoin futures market are motivated by speculation rather than hedging. This further puts in evidence the existence of asymmetric information within informed traders in Bitcoin futures market, and market participants would not insure their positions against Bitcoin price movements
Some scholars think that Bitcoin’s speculative dynamics have disappeared, and avenues are opened for other fundamentals driving Bitcoin price discovery
Summary
It has been more than two years since cash-settled Bitcoin futures contracts were provided by the Chicago Mercantile Exchange (CME). Before Bitcoin derivatives market existed, the only possible form of betting against a decline in Bitcoin price was to short sell. For Bitcoin price to go up, optimism was the main driver for speculators to demand Bitcoin. This has convinced investors and market participants that Bitcoin has a speculative nature when compared with real currency. The launch of the first Bitcoin futures contract in December 2017 has put an end to such speculative demand for Bitcoin. The demand for Bitcoin dropped, and the spot price has declined. This has pushed pessimistic traders to short sell and drives the price even lower. Some scholars (see, for example, Hale, Krishnamurthy, Kudlyak, & Shultz, 2018) think that Bitcoin’s speculative dynamics have disappeared, and avenues are opened for other fundamentals driving Bitcoin price discovery
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