Bitcoin drop tied to CME futures listing, Fed paper shows

SAN FRANCISCO, May 7 (Reuters) - Bitcoin’s drop in value from its December 2017 peak of $19,511 was tied directly to the listing of futures contracts tied to the cryptocurrency’s value, new research published by the San Francisco Federal Reserve showed Monday.

“The rapid run-up and subsequent fall in the price after the introduction of futures does not appear to be a coincidence,” four researchers wrote in the latest edition of the regional Fed bank’s Economic Letter.

Fed policymakers have been dismissive, particularly in recent months, of bitcoin’s promise as an alternative currency to the dollar or other central bank-backed money. San Francisco Fed President John Williams, who will next month move to New York to run the Fed there, has been particularly critical.

“One of the problems they have is the values are extremely volatile,” Williams said in April of cryptocurrencies in general and bitcoin in particular.

Trading in futures, which sometimes reduces volatility in the underlying asset, appeared this time to aid bitcoin’s fall.

The introduction of the contracts on CME, one week after a much thinner trade on began rival Chicago Board Options Exchange, gave bitcoin pessimists an easy way to bet on a drop in value. This is known as short-selling in the stock market but is an integral and unremarkable aspect of futures markets.

As trade in downside bets picked up on CME, the authors of the Fed paper wrote, that created a broader downcycle that affected the underlying “spot” bitcoin market as well, reducing order flow and putting downward pressure on the price.

“With falling prices, pessimists started to make money on their bets, fueling further short selling and further downward pressure on prices,” they wrote. (Reporting by Ann Saphir Editing by Chizu Nomiyama)