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

Abstract

Cryptocurrencies provide a unique opportunity to identify how derivatives impact cash markets. They are fully fungible across multiple trading venues and futures contracts were selectively introduced on bitcoin (BTC) exchange rates against the 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. We also find support for an increase in price efficiency, market quality, and liquidity. Overall, our analysis supports the view that the introduction of BTC-USD futures was beneficial to the bitcoin cash market by making the underlying prices more informative.