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Federal Reserve: CME Bitcoin Futures Prompted Bear Market

Federal Reserve: CME Bitcoin Futures Prompted Bear Market

In a statement widely overlooked by the Bitcoin community, the Federal Reserve published a letter on its website in May 2018 blaming the launch of Bitcoin futures markets on the Chicago Mercantile Exchange (CME) for the decline of Bitcoin’s price.

Indeed, Bitcoin futures launched on CME on 17 December 2017, the same day the biggest Bitcoin rally in history reversed into a fall. On the very first day of Bitcoin futures trading, futures opened at USD 20,650 and closed at USD 19,055.

The Federal Reserve says this sort of market behavior has been observed in other asset classes when futures markets are introduced. Specifically, it mentions how the mortgage industry boom was reversed when futures markets for mortgage securities were launched.

Its reason for this is that when a new asset class is born, there are optimistic investors who buy it up, driving the market upwards. However, pessimistic investors have no voice and no way to bet against an asset’s value, until futures markets are launched. Once futures markets are launched, pessimistic investors can short sell, where they buy futures contracts via a loan, sell them for cash and then buy back the contracts later at a lower price before the contracts expire.

The Federal Reserve implicitly says that Bitcoin would have kept rising past USD 20,000 if CME had not launched Bitcoin futures and explicitly says the CME Bitcoin futures are the exact reason for the beginning of Bitcoin’s price collapse.

Further, the investment opportunity presented by Bitcoin futures diverts investment away from the spot markets. Bitcoin futures on CME are cash settled, meaning no Bitcoins are backing them. Therefore, investment into the futures does not increase spot demand for Bitcoin but in fact, causes Bitcoin’s price to be lower since the money invested into the futures is diverted from the spot market.

The Federal Reserve explains how the combination of short selling and diversion of investment away from the spot markets creates a feedback loop which forces Bitcoin’s price lower.

 

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Federal Reserve Ex-Chair Receives Bitcoin Gift After Crypto Hate Speech

In a good example of the concept “kill them with kindness”, the former Chair of the Federal Reserve of the United States, Janet Yellen, has received BTC 0.0316 worth USD 20 following a speech that contained plenty of hate towards cryptocurrency.

Yellen was the Chair of the Federal Reserve from 2014-2018 and Vice President of the Federal Reserve from 2010-2014. On 29 October, Yellen made a speech at the Canadian FinTech forum, saying, “I will just say outright I am not a fan, and let me tell you why. I know there are hundreds of cryptocurrencies and maybe something is coming down the line that is more appealing but I think first of all, very few transactions are actually handled by Bitcoin, and many of those do take place on Bitcoin are illegal, illicit transactions”.

A study in August 2018 said that only 10% of Bitcoin transactions involve illegal activity, while a different study in January 2018 said it was only 1%.

Further, Yellen said, “For something to be a useful currency, it needs to be a stable source of value, and Bitcoin is anything but. So it’s not used for a lot of transactions, it’s not a stable source of value and it’s also not an efficient means for processing payments. It’s very slow in handling payments.”

In reality, it is well known that Bitcoin is a highly efficient way of sending payments that happen instantly if users do not wait for confirmations. Further, merchants can use processors like BitPay to convert to fiat when they receive Bitcoin, which insulates them from market volatility.

The founder of the Bitcoin gifting service Biterica, Raz Suprovici, sent Yellen USD 20 of Bitcoin to her email and said to the media: “People are afraid of the unknown. I was hoping that when she logged into her Bitcoin wallet with her ID and password, she would see it’s just like a typical online bank account. The money she owns is there, in her control, ready to spend. I hope that this sparks her openness to the technology. Maybe all policy-makers should be gifted a little bit of Bitcoin.”

Suprovici’s idea is simple yet effective. The powerful people who have been speaking against Bitcoin probably have never used it themselves, and sending them a little Bitcoin could change their hearts.

Yellen confirms she got the Bitcoin, saying, “I did receive a gift of Bitcoins this morning and have been very busy ever since so I’ve not looked into it further.” Some might say she has essentially turned from Bitcoin hater to Bitcoin hodler.

 

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Former FDIC Chair Warns US Federal Reserve It Needs Own Cryptocurrency

Sheila Bair, former chair of the US Federal Deposit Insurance Corporation (FDIC), has suggested that the Federal Reserve Bank should seriously consider the prospects of a central bank issued digital currency (CBDC), reports Yahoo Finance.

The concept of a cryptocurrency called FedCoin has provoked interest over past years, based on an idea proposed in 2014 by blogger JP Koning. Since then, the idea has been much discussed and the term is now generically used to describe a CBDC which could be overseen by the Federal Reserve, IMF, and the World Bank.

Currently, the US government can stimulate and slow economic activity in periods of recession and boom. A CBDC, in theory, would not have the same kind of culpability to large fluctuations in value given proper oversight and management by a centralized authority, suggests Coindesk.

Bair has her warnings regarding the Feds status quo regarding its crypto machinations, suggesting, “If it does not stay ahead of this technology, not only could banking be disrupted — but the Fed itself could also be at risk.”

Bair points out that centralized digital currencies would be “much more effective tools for conducting monetary policy to address economic cycle”, but does warn that credit availability issues do mean that consumers holding all of their funds in CBDCs could cause credit deficits without ensuring banks could remain competitive with Fedcoin. This would require careful Fed legislation.

Bair’s comments on the viability of CBDCs by the central bank are timely as government officials around the world are considering the merits of cryptocurrencies like Bitcoin in structure, but state-controlled in vision.

Major central banks now experimenting with digital currencies and blockchain are growing, including The Bank of England, the Banque de France, the People’s Bank of China, the Bank of Canada, the Central Bank of Russia and the Dutch Central Bank.

This is not the first call for a Fed digital currency. Kevin Warsh, former Federal Reserve governor, suggested earlier this year that the creation of a “FedCoin” needed “serious consideration”, as reported in the New York Times.

 

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Futures Launch Added to 2017 Bitcoin Slump, Says Fed

Three Federal Reserve Bank of San Francisco researchers and a finance professor from Stanford University are in agreement that it was the marketplace futures launch in 2017 which gave rise to the dramatic slump in the price of bitcoin, according to Coindesk.

The Federal Reserve paper describes Bitcoin’s December 2017 fall from a USD 20,000 peak as no “coincidence” pointing out that it was consistent with trading behavior that typically accompanies the introduction of futures markets for an asset.

The researchers pointed out that such markets, namely the launch of Bitcoin futures, played a significant role in the slump, and could be viewed as similar to the US housing bubble which developed in the during the 2000s. In this case, mortgage-backed securities were also susceptible to optimistic and pessimistic traders.

The researchers explain:

“And until December 17, those investors [optimists] were right: As with a self-fulfilling prophecy, optimists’ demand pushed the price of Bitcoin up, energizing more people to join in and keep pushing up the price. The pessimists, however, had no mechanism available to put money behind their belief that the Bitcoin price would collapse. So they were left to wait for their ‘I told you so’ moment.”

It was at about this time, at the end of 2017,  that the Chicago Board Options Exchange and the CME Group, the world’s leading derivatives marketplace, gained approval for Bitcoin futures trading from the Futures Trading Commission (CFTC). The price of Bitcoin fell to just above USD 6,000 by late February 2018.

Such pricing dynamics, researchers argue, refers to a trend where demand for a financial instrument is initially driven by optimists who push up the price until the point where the market introduces a mechanism that allows pessimists to invest reversely.

The New York Times has reported that the Intercontinental Exchange, owner of the New York Stock Exchange, could become the latest bank to offer bitcoin futures, stating:

“[ICE] has had conversations with other financial institutions about setting up a new operation through which banks can buy a contract, known as a swap, that will end with the customer owning Bitcoin the next day — with the backing and security of the exchange.”

 

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Bitcoin like a Regular Currency, Says St Louis Federal Reserve

In a blog entry posted 25 April, the Federal Reserve Bank of St. Louis likened Bitcoin to fiat currencies in a validation of one of the core premises of the currency.

The post, titled Three Ways Bitcoin Is Like Regular Currency, is based on research previously conducted by the reserve bank. While the study found that ”Bitcoin units have no intrinsic value”, it also acknowledged that currencies “such as the US dollar, the euro, and the Swiss franc… have no intrinsic value either”.

This provides a valid counter-argument to the misguided criticism that claims Bitcoin has a monetary value of zero because it is not tied to any real-world commodity. As the research points at, since the dismantling of the gold standard in the 1970s, the vast majority of national reserves rely on trust as a medium of value exchange.

The US dollar, for example, relies on a trust in the government and economy for their transactions to be facilitated. Bitcoin and cryptocurrencies, on the other hand, rely on computer coding and for the majority, the blockchain to facilitate transactions.

Libertarian proponents of cryptocurrencies have also argued a similar case to that of the Fed’s new study, but with an entirely different conclusion reached. They believe that cryptocurrencies are in fact a better alternative to national currencies, as they are not at risk of devaluation via inflation.

Bitcoin instead has a strictly fixed supply, as opposed to the Fed that has the ability to expand the money supply, even if not directly through printing more bank notes.

While the post does not directly endorse the use of Bitcoin or other cryptocurrencies, it does provide a certain amount of credibility, and authority as the comments come from an American federal agency.

However, the reserve bank of St Louis has previously been skeptical of Bitcoin, posting an entry in February 2015 that demeans the currency as inefficient. Some of the reasons cited in this post include the inefficiency of requiring mining as a proof-of-work model and the energy wasteful nature of this process.

 

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