Cryptocurrency market trends surrounding Bitcoin futures expiry event
In a rapidly evolving crypto market landscape, understanding the underlying dynamics driving price movements and investor sentiment can become a matter of survival. However, there are countless aspects to the reality of trading, and the only thing we can do is slowly understand them one by one. In this article, we will cover one corner of the cryptocurrency market and shed a little light on it. We have already written several times about the importance of introducing Bitcoin futures and its impact on Bitcoin price. Therefore, in this article, we specifically examine Bitcoin’s behavior regarding the critical event when Bitcoin futures expire.
First, a brief introduction to futures contracts or shortened futures.
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As mentioned several times in older articles, a futures contract is a financial contract that obligates a buyer to purchase a determined underlying asset (or sell that asset to a seller) at a predetermined future price and date. It’s a derivative. These are primarily used for portfolio hedging and speculation purposes.
- Each has special characteristics (trading hours, minimum price fluctuations, settlement, etc.) depending on the exchange on which they are traded. In this example, we are interested in CME Group’s Bitcoin futures contract specifications.
Mainly used in commodity/currency/rates and stock markets, but permanently (BTC-PERP) Futures (Shiller, Robert J., 1993).
It is important to note PERP It is (or at least initially was) traded on unregulated exchanges (often with up to 100x leverage), but has recently been added to reputable exchanges such as: coinbase (What is being traded is Nasdaq as a ticker coin) too.
Perpetual futures do not have an expiration date, whereas traditional futures do have an expiration date. Therefore, we are interested in the impact that the introduction of traditional liquid futures on the CME exchange and its expiry calendar will have on the underlying Bitcoin price.
Related (research and) literature
We are partly inspired by (N. Blasco, P. Corredor, and N. Satrustegui, 2023) and encouraged to continue their steps and choose our own direction for the research gap. I did. To briefly summarize, this paper studies the impact of monthly expiry dates on the intraday movement of the Bitcoin market. Their results show that there are significant changes in trading volume, volatility, and returns for Bitcoin, an asset that trades simultaneously on many exchanges, around expiration.
- The general effect on trading volumes, at least for cash-settled contracts, is to increase before maturity and decrease thereafter.
- As volume increases, volatility tends to increase and vice versa. However, the impact on volatility takes less time than the impact detected on volume.
- As with some formally regulated futures under analysis, there is overlap with possible effects from other unregulated futures with precise expiration dates, as well as other advanced types such as options and futures with daily expirations. The maturity of the product can also affect the results. Available on spot market.
- The introduction of Bitcoin futures contracts in a regulated market is expected to increase trading by institutional investors.
Their research sheds light on cryptocurrencies and raises questions about market efficiency and how the price of Bitcoin stabilizes. They empirically confirm that there is a clear anomaly in the spot market when the futures expiration date arrives, and this phenomenon is clearly visible in the hours surrounding the expiry date.
Our plan is to follow in the footsteps of Mr. Blasko, Mr. Corredor, and Mr. Satorstegui and study the impact of futures expiration on daily time frames, spot Bitcoin prices, and BTC ETF prices.
Data and collection
We relied on one source, Yahoo Finance, from which we downloaded historical data for two assets.
YF I got the data on the spot. BTC Provided by CoinMarketCap, which is often a reliable source of pricing information for derivatives exchanges when calculating mark prices. They do this by accumulating and aggregating prices and volumes from the most reputable exchanges. And we believe this is the closest to the “real” price of Bitcoin (you can buy/sell at any time).
The data sample begins with the first BTC futures expiration date on Friday, December 29, 2017 and continues through February 28, 2024. Bitcoin Spot trades 24/7, and each trading day in the data ends at 0.00 UTC time.
Approach and methodology
You need a little history window with an easy-to-understand timeline and key points.
- Cboe Bitcoin futures are the first U.S.-regulated futures of their kind and were launched on December 10, 2017. (Cboe Global Markets, Inc. – Investor Information, News Release May 16, 2018)
- Then (8 days later) CME announced that new Bitcoin futures contracts will be available for trading on December 18th. CME There was an announcement Commodity Futures Trading Commission The world’s largest futures exchange and its competitors CBOE Futures Exchangeinitiate a Bitcoin contract. CNBC I’ve reported on this in several articles article.
- Speaking of future options, unlike normal market hours, Bitcoin contract positions expire on the following day. CME Last Friday 16:00 London time monthly. (Ridotto, 2023)
- BitoThe first of its kind was created on 10/18/21.as proshares Investment prospects point out that Bito Invest in Bitcoin futures and not spot Bitcoin. There is no guarantee that the Fund will closely track Bitcoin returns. But it’s very possible, and for a long time until January 2024, it was the only reliable way for institutional investors wanting to invest. BTC exposure in ETF shape.
- Then came the first spot, the US ETF (previously there were European and Canadian ETFs, but those were thinly traded and thus had a negligible impact on the spot Bitcoin price) But this is fast forward and another story.
But back to the topic.
Since we only have a very small sample of spots (a few weeks), ETF, events, surrounding circumstances, and their impact on future prices during maturity are not yet clear. I’ll leave speculation open. What is definitely interesting is trad fin “Classic” events are diverge there ETFTherefore, it affects spot and futures prices. We’re talking about the impact of holidays, the turn of the month, etc., all of which we don’t know yet.
Let’s start with the simple subtask “Plot Spots”. BTC action in t A few days ago (t-3 to t-1),(Day) d), after the expiration event (d+1 to d+3) and try to draw some conclusions. Our hypothesis is that the introduction of BTC futures trading may affect his BTC spot return around the expiration date of his BTC futures (in Blasco, Corredor, and Satrustegui’s study, the introduction of BTC futures trading around the expiration date has already been shown to have a diurnal pattern).
This bar chart nicely shows the arithmetic (linear) average of Friday, today’s returns. d (I introduced it before) and the days around it.
You can see that BTC rose significantly during the expiry, but had a negative return on the previous day. Note that the returns for the following weekends (d+1 and d+2) are equivalent to the returns 3 and 2 days before the expiration date and are not significant. The best day for returns seems to be the first Monday after the expiry date.
This is from the full sample, but we’ll focus on two subsamples:
- in front Bito launch;
- onwards Bitou launch.
This is our question -> Is there an impact? ETF-Traded Bito What about returns before and after expiration? Our hypothesis is that with the introduction of the BITO ETF, there will be large inflows into BTC futures, which could change the pattern of returns around the expiry of BTC futures.
Until BITO creation (last expiry date is Friday) September 24, 2021):
Spots from Bito Since creation (initial expiration date is Bito in a trading environment of New York Stock Exchange Arca an exchange was taking place October 29, 2021):
Astute readers will understand “Price Action” (It will be returned as the expiration date approaches) It looks like the date has been reversed. Bito launch. The daily pattern of his BTC returns in the pre-BITO period (2017-2021) is similar to the entire period (2017-2024). On the other hand, the pattern of daily returns after the introduction of BITO ETF (2021-2024) is reversed, especially before and on the day of maturity.
Finally, let’s take a quick look at the returns. Bito ETF (Obviously, it tracks from the first expiration date on the futures. As previously stated, October 29, 2021):
There is one very important caveat. Because BITO trades only on business days, rather than as BTC spot 24/7, the chart above shows its performance around the expiration date of the NYSE exchange trading calendar. Therefore, d+1’s performance includes performance from Friday’s New York Stock Exchange close (4:00 p.m. ET) to next Monday’s close (4:00 p.m. ET). Therefore, Saturday and Sunday returns are also included.
Expiration date Friday, BitoSimilar to BTC Spot, performance decreases compared to a few days before expiration (d-2 and d-1) But it’s Monday that really shines (d+1) (same as spot or perpetual futures on unregulated exchanges).
Natural questions arise, of course. What would the performance curve look like if you used the BITO ETF to build a trading strategy based on the number of days around the futures expiration date?
and here comes capital curve (y– An axis that represents the rise/fall of each dollar invested in the strategy, or /100 Back % to make it in time):
Using traditional performance tables:
Therefore, if you plan to trade near the expiry date of your BTC futures, you should consider the days before and after the expiry date (Thursday and subsequent weekend + Monday) and avoid the expiry date itself. This pattern is similar to the stock index option expiry week strategy.
Unfortunately, we only have a relatively short sample (4 and 3 years) Around the time) used in our analysis, the data suggests that BTC futures expiration dates impact BTC spot prices and the BITO ETF. However, our research does not end here. Certainly, the introduction of a BTC spot ETF can and likely will impact price trends. We plan to revisit this study and analyze the impact of BTC spot ETFs once more data is available. Should price fluctuations become more pronounced or disappear completely? Time will tell.
Author: Cyril Dujava, Quantpedia Quant Analyst
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