Bitcoin and other cryptocurrencies are traded in many online exchanges around the globe 24 hours a day, seven days a week, and there is strong evidence that Bitcoin prices are not limited, even between high-market share trades, so data can be transferred for hours or even days. Bitcoin, on the other hand, is not very adaptable, keeping the idea that it is, at best, a new form of speculative commodity for sale that could function in an imperfect traditional currency (Dyhrberg, 2016). Several authors, including Bariviera (2017), Blau (2017), Katsiampa (2017), Gkillas, and Katsiampa (2018), have addressed bitcoin volatility. 

Key Takeaways

• CBOE bitcoin futures are a good way to hedge bitcoin on a daily basis
• Bitcoin futures can help to cushion the blow of big losses in the bitcoin spot market
• Bitcoin futures can be used to hedge the price risk of other cryptocurrencies
• Bitcoin futures positions could raise the tail risk of other cryptocurrencies

The impact of futures trading on the price, volatility, and efficiency of bitcoin

Bitcoin futures research is currently sparse due to its novelty. The impact of futures trading on the price, volatility, and efficiency of bitcoin was one of the first areas of investigation. The bitcoin price began a sharp dropping path at the time of the launch of these futures contracts, and the two events were inevitably related. According to Hale et al. (2018), bitcoin futures allowed pessimists to enter the market, resulting in a reversal of bitcoin price trends. Baur and Dimpfl (2019) agree, arguing that bitcoin futures allow investors to bet against bitcoin in a regulated environment with margin requirements significantly lower than previously necessary. Corbet et al. (2018a) indicate that bitcoin volatility is high using 1-minute price data.

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The findings show that bitcoin futures can be used to hedge not only bitcoin but also other major cryptocurrencies. Bitcoin futures can even deal with bitcoin tail risk, but they can also take advantage of other currencies’ significant losses.

CBOE Bitcoin Futures are a Good Way to Hedge Bitcoin on a Daily Basis

CBOE bitcoin futures are, without a question, an effective hedging instrument for bitcoin, at least on a daily basis. This assertion is unaffected by the source of bitcoin price data and is unaffected by the methodology used to calculate the hedge ratios. Hedging with bitcoin futures, it is argued, can even lessen the impact of large losses in the bitcoin spot market.

Delta exchange, a continuous online market for cryptocurrencies, has the best hedging performance. The time gaps between futures prices and daily Gemini and CoinMarketCap prices, the smaller trading volume at Gemini, and the availability of stale prices in the VWAP derived by CoinMarketCap are all possible factors.

Because bitcoin futures are highly associated with other cryptocurrencies like ethereum, litecoin, and ripple, these futures contracts can be used to hedge the price risk of multiple cryptocurrencies.

There is some information, moreover, that futures trading positions may raise tail risk. A collateral impact of hedging cryptocurrencies using bitcoin futures has been a favorable influence in the mean return during this period of substantial daily losses.

As a result, other hedging efficiency measures that consider both risk and mean return, such as Hsin et al. (1994)’s difference in certainty equivalents, would provide a more accurate picture of the hedging effectiveness of bitcoin futures.

Bitcoin futures, on the other hand, have seen a limited level of liquidity. During the sample period, the daily trading volume of adjacent CBOE bitcoin futures contracts was only 3881 bitcoins, and the daily price range (the difference between the daily high and low values) was on average $590, or around 7% of the corresponding daily close prices. Our findings do not account for liquidity limits or implicit trading costs, but given the poor liquidity of bitcoin futures, these could be significant concerns for a potential hedger.