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

Abstract

Cryptocurrencies provide a unique opportunity to identify how derivatives impact spot markets. They are fully fungible and trade across multiple spot exchanges at different prices, and futures contracts were selectively introduced on Bitcoin (BTC) exchange rates against the U.S. dollar (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 arbitrage 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. This paper was accepted by Will Cong, Special Section of Management Science: Blockchains and Crypto Economics. Funding: The authors acknowledge financial support from the Global Risk Institute. P. Augustin acknowledges financial support from the Canadian Derivatives Institute and from the Canada Research Chair Program of the Social Sciences and Humanities Research Council Canada. The paper has benefited significantly from a fellow visit of P. Augustin at the Center for Advanced Studies Foundations of Law and Finance funded by the German Research Foundation, project FOR 2774, and from a visiting position of P. Augustin at the finance department of the University of Luxembourg facilitated through the Inter Mobility Programme of the Luxembourg National Research Fund. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2023.4900 .