FOREIGN TRADE UNIVERSITY

FACLTY OF BANKING AND FINANCE

……..***……..

MIDTERM ASIGNMENT
GROUP 16

TOPIC: BITCOIN FUTURES AND FACTORS AFFECTING THE

HEDGING EFFECTIVENESS

Class: TCHE409(2324-2)1.1BS

Intructor: Dr. Nguyen Dinh Dat

Team member: Student ID

Phạm Thị Minh Hoài 2212340035

Nguyễn Chi Mai 2212340053

Đặng Thanh Mai 2212340052

Ha Noi, March 2024

ABSTRACT
Bitcoin, as a trailblazer in the realm of cryptocurrencies, has profoundly
influenced our perception and interaction with money. Its decentralized structure and
finite supply imbue it with the potential to serve as a safeguard against inflation and
a reservoir of value. However, engaging in Bitcoin trading entails significant risks.
Bitcoin futures contracts present investors with an avenue to speculate on
forthcoming price fluctuations of Bitcoin without necessitating ownership of the
underlying asset. Despite the impact Bitcoin futures have on market dynamics, it's
crucial to recognize various factors influencing their effectiveness in hedging. These
factors encompass macroeconomic indicators, market liquidity, volatility, and
overall market sentiment. While Bitcoin futures offer potential benefits for hedging
against price fluctuations, their effectiveness is subject to various factors beyond the
control of individual investors. Understanding and accounting for these factors is
crucial for employing Bitcoin futures contracts as part of a risk management strategy
in cryptocurrency trading.

1. Introduction
Cryptocurrency functions as a decentralized digital payment system,
eliminating the need for traditional banking institutions to verify transactions. Its
market operates solely on the principles of supply and demand, facilitating peer-to-
peer transactions globally. Bitcoin stands as the foremost cryptocurrency, pioneering
the concept of transferring value without the reliance on centralized authorities to
prevent fraudulent double-spending. Enabled by its underlying technology, the
blockchain, Bitcoin decentralized trust across a network of nodes, each running
open-source software. Satoshi Nakamoto, the enigmatic creator of Bitcoin,
envisioned it as a trustless electronic transaction system.
Derivatives in the cryptocurrency realm hinge on market participants'
expectations. Essentially, a crypto derivative is an agreement stipulating the purchase
or sale of a cryptocurrency or asset at a predetermined future price and time. Given
the inherent risk in the crypto market, the introduction of derivatives becomes
imperative for its maturation. Crypto derivatives serve three primary functions for
investors (Yang, 2021):

 Risk management
The volatile nature of cryptocurrency prices poses risks, particularly for
individuals reliant on crypto assets like bitcoin miners. By establishing
predetermined prices in advance, investors can effectively hedge against future price
fluctuations, particularly beneficial for optimistic crypto enthusiasts.
 Speculation

Speculation serves as a significant driving force behind crypto derivatives.

Speculators, ranging from casual investors to professionals, seek to capitalize on
price volatility. In this context, both bullish and bearish investors participate, with
the latter shorting cryptocurrencies when anticipating price declines, as evidenced
post the 2017 bitcoin surge.

 Leverage
Crypto derivatives offer investors the opportunity to amplify both risks and
rewards through leverage. Margin trading, a common feature in derivatives, allows
investors to open positions exceeding their initial deposits. This functionality proves
vital for investors with strong convictions about future price trends, enabling them
to potentially enhance gains.
In essence, cryptocurrency derivatives play a pivotal role in managing risk,
facilitating speculation, and offering leverage opportunities, catering to a diverse
array of investors in the dynamic crypto market.
2. Background of bitcoin futures
2.1. Emergence of Bitcoin futures as a financial instrument
 2.1.1. History of bitcoin futures
The early stage of Bitcoin futures started from 2011-2017 (Kate Yang, 2021).
The emergence of Bitcoin futures in 2011 marked a significant milestone in the
history of cryptocurrency derivatives, initially introduced on the ICBIT platform.
Despite early interest, they faced challenges due to Bitcoin's limited acceptance and
the basic nature of trading platforms. However, initiatives like 1Broker and
Grayscale encouraged investment in Bitcoin by both individuals and institutions,
leading to its wider acceptance. A significant milestone occurred in 2014 with the
introduction of BitMEX, which offered a more user-friendly interface and introduced
innovative products like the perpetual swap in 2016. These advancements
transformed the crypto derivatives market and led to increased adoption by major
exchanges. In essence, the text highlights the journey of Bitcoin futures from their
initial stages to becoming widely accepted, characterized by challenges, gradual
acceptance, and key innovations such as BitMEX's perpetual swap.
In 2017, significant developments unfolded in the realm of cryptocurrency
derivatives. With Bitcoin's price soaring to an unprecedented high of around $20,000
in December, the Chicago Board Options Exchange (CBOE) and the Chicago
Mercantile Exchange & Chicago Board of Trade (CME) decided to introduce futures
contracts tied to Bitcoin. This move provided traders with a regulated platform for
trading derivatives. Yang said this attracted traditional investors seeking exposure to
cryptocurrency markets without direct ownership. Initially buoyed by optimism, the
market experienced a rapid surge followed by a steep decline, leading to a cooling of
investor interest and some financial institutions exiting the cryptocurrency space.
CBOE ceased Bitcoin futures listing in March 2019, marking a notable shift in
sentiment towards cryptocurrency derivatives.
In 2019, despite some downward pressure on Bitcoin's value, there was
notable expansion in the crypto derivatives sector, marked by a sharp rise in trading
volumes and record-breaking highs across various exchanges. Bitcoin futures
became increasingly popular, surpassing trading volumes in the spot market,
reflecting patterns seen in traditional financial markets. This period saw the
emergence of prominent platforms such as Bybit, Quedex, and Bakkt, offering
diverse derivative products to cater to varying investor preferences. Amidst the
global pandemic in 2020, economic uncertainties prompted governments to
implement stimulus measures and quantitative easing, which raised concerns about
inflation. Consequently, there was a noticeable shift towards the cryptocurrency
market, particularly Bitcoin, with growing interest from institutional investors like
MicroStrategy and Square. Bitcoin's value surged past $40,000 in January 2021,
driven by heightened institutional adoption and widespread acceptance.
The rise of Bitcoin sparked increased demand for hedging crypto-related risks,
further boosting the appeal of the crypto derivatives market. This growth was
accompanied by heightened regulatory scrutiny, leading many exchanges to relocate
their operations. As a result, Asia, particularly Singapore, emerged as a new global
center for cryptocurrency derivatives due to its reputation for fostering innovation
and its favorable regulatory environment.
2.1.2. How Bitcoin futures contract works
A bitcoin futures contract is an agreement between a buyer and a seller to trade
bitcoin at a predetermined price at a predetermined date in the future. At the
expiration date, some futures can be physically-settled, some can be settled by cash.
There are two positions for a bitcoin futures contract: long and short. The long
position agrees to buy bitcoin at a specific price in the future, while the short position
agrees to sell. In a bullish market, more people open long contracts since they expect
the price to rise. The higher the price can achieve in the future, the more profitable
people holding long position will be.
2.2. Bitcoin futures’ impact on market dynamics
2.2.1. Bitcoin price discovery
 The launch of bitcoin futures contracts on major exchanges in late 2017 marked
a significant development in the maturation of the cryptocurrency ecosystem. As the
first regulated derivatives products pegged to bitcoin's price, futures trading had the
potential to meaningfully alter bitcoin's price dynamics and volatility. Their
introduction catalyzed debate about how increased trading sophistication and
leverage might impact the still nascent but booming bitcoin market. Analysts have
since studied the relationship between the onset of bitcoin futures and changes in
bitcoin's price behavior. While correlation does not prove causation, several analyses
have found evidence that certain effects emerged in the aftermath of this watershed
event for cryptocurrency financialization. In particular, many observed the near-
simultaneous nature of the following phenomena and sought to understand their
linkage.
As Hale et al. (2018) explained, the introduction of bitcoin futures gave skeptics
and opponents of bitcoin an easy way to take short positions and bet against the
cryptocurrency through a regulated market. Prior to the futures, "going short" on
bitcoin required more complex transactions without the protections of exchanges.
Baur and Dimpfl (2019) agreed with this analysis, finding that futures allowed
pessimistic investors to enter the market in a simpler, lower-risk manner compared
to previous options. They argue this influx of new short selling pressure through
regulated futures trading may have contributed significantly to the reversal of
bitcoin's parabolic price rise at the time. While correlation does not always imply
causation, the near-simultaneous nature of bitcoin futures launching and prices
plunging added credibility to the theory that increased short selling pressure was a
material factor in bitcoin's dramatic 2017-2018 price cycle top and reversal.
Most research on bitcoin spot and futures markets has focused on analyzing
relative price discovery using long-run metrics from vector error correction models
(VECM). Common metrics employed include Hasbrouck information shares and
Gonzalo-Granger common factor weights to measure price leadership over extended
time periods. In a study of 5-minute CME, CBOE futures and Bitstamp spot prices
from the launch of futures trading through October 2018, Baur and Dimpfl (2019)
found that the majority of price discovery occurs in the underlying spot market. They
suggest this is likely due to the much greater global trading volume in the bitcoin
spot market worldwide relative to regulated futures exchanges. Additionally, futures
markets trade only during official exchange hours each day and not over weekends,
whereas the bitcoin spot market operates continuously 24/7. Therefore, according to
Baur and Dimpfl, interruptions to futures liquidity and trading provide an advantage
to the round-the-clock bitcoin spot market in quickly incorporating new information
into prices—a probable factor in its primacy in the overall price determination
process.
2.2.2. Market volatility
The emergence of bitcoin futures trading raised questions about its impact on the
volatility of the underlying bitcoin spot market. In a study examining bitcoin price
movements at an even finer granularity, Corbet et al. (2018a) analyzed 1-minute
price data to investigate how the introduction of bitcoin futures trading may have
impacted volatility. Their research found that after major futures exchanges like
CBOE and CME launched bitcoin futures contracts in late 2017, the cryptocurrency
experienced a rise in volatility as measured over 1-minute intervals. This suggests
that with the added layer of derivatives markets comes increased short-term
fluctuations in the underlying bitcoin price. The availability of regulated futures
trading may have given rise to more frequent speculative positioning by traders
reacting quickly to minor price swings. The influx of new short-term speculative
flows interacting with the existing spot market liquidity could consequently produce
sharper volatility. Therefore, Corbet et al.'s high-frequency analysis provides
intraday evidence that entering bitcoin's maturing economic ecosystem with
derivatives preceded an elevation in short-term price variability, even as longer-term
studies find the spot market still leads price discovery over the long-run.
 2.2.3. Informational efficiency
As bitcoin futures trading matured, researchers began analyzing its potential
impact on informational efficiency in cryptocurrency markets. A key question was
whether regulated derivatives improved price discovery by helping relevant new
information get reflected more quickly in bitcoin prices.
In a daily data analysis, Köchling et al. (2018) found that the launch of bitcoin
futures contracts on major exchanges increased the informational efficiency of the
bitcoin market. Specifically, they concluded prices incorporated new information
more quickly after the introduction of regulated derivatives. However, their research
found no noticeable effect on the efficiency of other large cryptocurrencies like
ethereum, litecoin, ripple and bitcoin cash from the bitcoin futures. The authors posit
this improved informational efficiency for bitcoin alone can be attributed to regulated
futures easing institutional investors' access to the bitcoin market in a way that did
not similarly impact other digital assets. By providing a lower-risk vehicle for Wall
Street players to gain cryptocurrency exposure, bitcoin futures likely enhanced the
participation of more sophisticated, deep-pocketed traders. This influx of
professional market participation brought increased transparency to the bitcoin price
discovery mechanism on a daily basis, advancing its informational properties even
as other cryptocurrency markets remained unchanged from this development in the
bitcoin ecosystem.
3. Factors affecting hedging effectiveness of Bitcoin futures on Crypto
market
3.1. Market Liquidity

The effectiveness of hedging strategies utilizing Bitcoin futures in the

cryptocurrency market is significantly influenced by various factors, among which
market liquidity stands out as a pivotal determinant. In the context of Bitcoin futures,
liquidity plays a crucial role in determining the efficiency of hedging mechanisms
(Alexander et al., 2021). (Joseph, 1993) refer that market liquidity refers to the ease
with which assets can be bought or sold without causing significant price
movements. Andani et. al. (2009) found that liquidity plays a significant role in the
effectiveness of hedging strategies, particularly in the futures market. This is
consistent with the findings of Lafuente and Novales (2003) in the IBEX 35 futures
market study. The importance of liquidity in enhancing hedging strategies is further
emphasized in the context of international monetary stability, where liquidity is seen
as a facilitator of hedging.
The importance of liquidity in the capital market is also highlighted in the context
of emerging market exchanges, where liquidity is seen as enabling investors and
issuers to meet their requirements in investment, financing, and hedging (Daniela et
al.,2016). In the context of Bitcoin futures hedging effectiveness, a comparison
between two scenarios—one with high liquidity and the other with low liquidity—
reveals a number of important distinctions that have a substantial impact on market
dynamics and the success of hedging methods.

In a scenario characterized by high liquidity, market participants enjoy several

advantages that enhance the effectiveness of hedging. When liquidity is most valued,
an optimal hedge optimizes the firm's liquidity, or slack in the form of extra cash or
unused debt capacity. As a result, there is less chance of expensive financial distress,
the effective cost of external financial restraints is lowered, and value-maximizing
investments become more cheap.(Mello & Parsons, 2000). Besides, strong liquidity
makes sure that a sizable number of buyers and sellers are engaged in the market,
which makes it easier to execute trades at favorable pricing. Because there are more
people in the market, bid-ask spreads are tighter, which reduces the cost of changing
positions. Because of this, hedgers can easily open and close bets without
experiencing a lot of slippage, which enhances the accuracy and effectiveness of their
hedging operations.
 Conversely, in a situation when there is little liquidity, the efficacy of hedging is
undermined because of many difficulties that arise in illiquid markets. First, larger
bid-ask spreads caused by insufficient liquidity make it more expensive for hedgers
to enter and exit positions. Furthermore, because there are fewer active buyers and
sellers due to the shallowness of the market, there is a higher chance of price slippage
when placing trades. Because of this, hedgers can have trouble finding counterparties
ready to transact at the prices they want, which could cause delays or less-than-ideal
hedging strategy implementation.

Furthermore, because of the thinness of the order book, even relatively little trades
can result in exaggerated price fluctuations, which intensifies the influence of market
orders. The effectiveness of hedging methods is further undermined by this increased
price volatility, as hedged positions may be more vulnerable to unfavorable price
fluctuations.

3.2. Market Sentiment

Market sentiment, often described as the overall mood of brokers and investors
about a stock or the stock market as a whole, can have a significant impact on
investment decisions and market behavior. The hedging effectiveness of bitcoin
futures may also be influenced by the sentimental mood and perception of investors
towards the cryptocurrency market, which can affect their demand and supply for
bitcoin and its derivatives. The perception of the cryptocurrency market can swing
from optimistic to pessimistic, and understanding these shifts in sentiment is essential
for successful investing (Bull Market Rhymes, 2022). Bearish sentiment and fear in
the equity market seem to lead investors to invest in the cryptocurrency market as
one of the alternative assets, thereby causing an increase in cryptocurrency
prices(Anamika et al., 2023)
A sentiment-based model for Bitcoin has been proposed, which considers a
sentiment indicator as a factor affecting the price dynamics of Bitcoin (Cretarola et
al., 2020). The impact of global uncertainty and sentiment factors on Bitcoin returns
has been measured to determine the hedging effectiveness of Bitcoin Market
sentiment has been identified as a factor influencing dynamic hedging effectiveness
in asset marketsNews-based Bitcoin sentiment has been found to affect the Bitcoin
price of the futures market, indicating the influence of sentiment on Bitcoin
prices(Naifar et al., 2023). Additionally, investor sentiment has been shown to
exhibit a lead lag relation with both Bitcoin futures and spot markets (Narayanasamy
et al., 2023). The hedging effectiveness of Bitcoin has been found to be highest in
certain cases, indicating that it may serve as an effective hedge in the cryptocurrency
market. Overall, sentiment factors have been shown to play a significant role in the
effectiveness of Bitcoin futures as a hedging tool in the cryptocurrency market.
When the equity market sentiment is low or pessimistic, investors seem to
invest in cryptocurrency as an alternative asset to diversify the portfolio (Baker and
Wurgler 2006). This implies that when the investors are bearish in the equity
markets, Bitcoin experiences an increase in prices, suggesting that bitcoin has the
potential to be used as one of the diversifying assets against the stock markets. This
result is consistent with the findings of Gurdgiev and O’Loughlin (2020); when
investors are uncertain about the stock market, they seek to invest in other avenues
like Bitcoin. Bitcoin is the most popular and highly recognized cryptocurrency.
Hence, investors are swayed more toward Bitcoins as one of the diversifying assets
during times of uncertainty than any other cryptocurrency.
For instance, when investors are optimistic and confident about the future
prospects of the cryptocurrency market, they may increase their demand for bitcoin
and its futures, which can drive up their prices and reduce the basis risk (the
difference between the spot and futures prices).Conversely, when investors are
pessimistic and fearful about the future outcomes of the cryptocurrency market, they
may decrease their demand for bitcoin and its futures, which can drive down their
prices and increase the basis risk.
 Therefore, it is important for investors to understand how different sentimental
moods and perceptions of investors towards the cryptocurrency market can affect the
hedging effectiveness of bitcoin futures. By doing so, they can adjust their hedging
strategies accordingly and optimize their risk-return trade-offs. Furthermore, they
can also use sentiment analysis tools, such as social media platforms, news articles,
and online forums, to monitor and measure the prevailing sentiment in the
cryptocurrency market and anticipate its potential impacts on the price movements
of bitcoin and its futures.

3.3. Macroeconomic Factors

(Alexander et al., 2021)conducted a study on the hedging effectiveness of

Bitcoin futures contracts and found that the daily settlement prices were influenced
by economic and technology factors. Similarly, the relationship between Bitcoin and
resource commodity futures was found to be influenced by variables related to the
U.S. economy (Lin & An, 2021). Additionally, the study by Business Perspectives
(2021) indicates that macroeconomic factors affect the speculation-hedging ratios on
individual Bitcoin futures contracts futures.

3.3.1. Interest Rates

One of the challenges of hedging with bitcoin futures is the effect of interest
rates on the pricing and effectiveness of these contracts. Interest rates affect the cost
of carry and the basis of futures, which in turn influence the optimal hedge ratio and
the risk reduction achieved by hedging. According to Zhang et al. (2021), interest
rates also affect the liquidation risk of futures positions, especially for inverse
contracts that are denominated in US dollars but settled in bitcoins. The authors
propose a dynamic hedging strategy that accounts for the liquidation risk and the
basis risk of bitcoin futures, and compare its performance with several direct and
inverse hedging instruments traded on different exchanges. They find that the
optimal strategy combines superior hedge effectiveness with a reduction in the
probability of liquidation.
Another study by Sebastião and Godinho (2019) investigates the hedging
properties of CBOE Bitcoin futures during their initial months of trading, using daily
data from several sources. The authors estimate OLS hedge ratios and calculate the
variance reduction achieved by hedging with bitcoin futures. They conclude that
bitcoin futures are effective hedging instruments not only for bitcoin, but also for
other cryptocurrencies. They also find that bitcoin futures can cope with bitcoin tail
risk, but they may leverage the existence of extreme losses for other currencies.
These studies suggest that bitcoin futures can provide an effective tool for
hedging cryptocurrencies, but they also highlight the importance of considering the
interest rate effects and the liquidation risk when designing hedging strategies.

3.3.2. Inflation:

Inflation is a persistent increase in the general level of prices of goods and

services over time, which erodes the purchasing power of money. Bitcoin is a
decentralized cryptocurrency that has a fixed supply of 21 million units and a
predictable issuance rate. Some investors and analysts have argued that bitcoin can
serve as a hedge against inflation, as its scarcity and independence from central
authorities make it less susceptible to devaluation

One of the main challenges of using bitcoin as an inflation hedge is its high
volatility, which makes it difficult to predict its future value and risk-adjusted returns.
Bitcoin's price can fluctuate significantly in response to market sentiment, news
events, technical factors, and supply and demand dynamics. For example, in 2021,
bitcoin reached an all-time high of nearly $70,000 in November, but then dropped
by more than 50% in December amid regulatory crackdowns, environmental
concerns, and profit-taking. Such extreme swings can expose investors to significant
losses and uncertainty, especially in the short term.
Another factor that affects bitcoin's inflation hedging potential is its adoption
and acceptance by mainstream institutions and users. Bitcoin's value derives from its
network effect, which means that the more people use it, the more valuable it
becomes. However, bitcoin still faces many barriers to widespread adoption, such as
scalability issues, security risks, legal uncertainties, and lack of awareness and
education.
Finally, a factor that determines bitcoin's effectiveness as an inflation hedge is
its correlation with other assets, such as stocks, bonds, commodities, and gold.
Correlation measures the degree to which two assets move in relation to each other.
A low or negative correlation implies that the assets tend to move in opposite
directions or independently of each other, while a high or positive correlation implies
that they tend to move in the same direction or together. Ideally, an inflation hedge
should have a low or negative correlation with inflation-sensitive assets, such as
bonds and fiat currencies, and a high or positive correlation with inflation-resistant
assets, such as commodities and gold.
However, bitcoin's correlation with other assets is not stable or consistent over
time. It can vary depending on market conditions, investor preferences, and external
factors. For example, in 2020, bitcoin showed a positive correlation with stocks
during the COVID-19 pandemic-induced market crash in March but then diverged
from stocks during the subsequent recovery. Similarly, in 2021, bitcoin showed a
negative correlation with gold during the first half of the year but then switched to a
positive correlation during the second half of the year. Therefore, bitcoin's
correlation with other assets may not provide reliable diversification or protection
benefits for investors.
In conclusion, bitcoin has some characteristics that make it a potential hedge
against inflation, such as its limited supply and decentralized nature. However, its
effectiveness as an inflation hedge is not clear-cut or proven. It depends on several
factors that can change over time and affect its price performance and risk-return
profile. Therefore, investors should be cautious and well-informed before using
bitcoin as an inflation hedge.

3.3.3. Economic Growth and Recession

During periods of economic uncertainty or recession, investors may seek safe-

haven assets like Bitcoin, affecting the correlation between Bitcoin futures and
traditional assets and the effectiveness of hedging strategies.

The hedging effectiveness of bitcoin futures may depend on the economic

conditions and the market dynamics of the underlying asset. Bitcoin is known for its
high volatility and susceptibility to speculative trading, which can increase the risk
of liquidation for futures positions that are maintained with a self-selected margin.
In periods of economic growth, the demand for bitcoin may increase as investors
seek alternative assets with higher returns, while in periods of recession, the demand
may decrease as investors become more risk-averse and prefer safer assets. These
fluctuations in demand can affect the spot and futures prices of bitcoin, as well as the
correlation between them, which in turn can influence the optimal hedging strategy
and the hedge ratio. According to Alexander et al. (2021), hedgers of bitcoin should
account for the possibility of automatic liquidation by the exchange and minimize
both the variance of the hedged portfolio and the probability of liquidation due to
insufficient collateral. They derive a semi-closed form for an optimal hedging
strategy that depends on the statistical characteristics of the spot and futures extreme
returns and parameters that characterize the hedger by loss aversion, choice of
leverage and collateral management. They also compare the performance of seven
major direct and inverse hedging instruments traded on five different exchanges,
based on minute-level data, and link this performance to novel speculative trading
metrics, which differ markedly between venues. They find that inverse perpetuals
offer greater effectiveness than direct perpetuals, which also exhibit more
speculation.
Another factor that may affect the hedging effectiveness of bitcoin futures is
the mode of recognition in the financial market and the regulation and legality of
bitcoin. As Chakraborty et al. (2021) point out, there is a huge literature on hedging
with futures examining the use of commodities, currencies, interest rates, stocks and
index futures as effective hedges of spot price risk, but there is little in-depth research
into the role that bitcoin futures can play to hedge bitcoin spot price risk. They argue
that this is partly due to the lack of consensus on whether bitcoin is a currency, a
commodity, an asset or a hybrid, which has implications for its regulation and
legality across different jurisdictions. They survey the economics and finance
literature on bitcoin and categorize it into varied themes: price dynamics, volatility,
bubble dynamics, mode of recognition in the financial market, efficiency, economics,
social media and investor sentiment, and regulation and legality. They suggest that
future research should focus on exploring the potential benefits and challenges of
using bitcoin futures as a hedging instrument in different economic scenarios.

4. Conclusion
The emergence of regulated bitcoin futures trading introduced a new dimension
to the cryptocurrency ecosystem. While initial studies found their launch
corresponded to price declines and increased volatility, longer-term research showed
the spot market retaining primacy in price discovery. By facilitating improved
institutional access to cryptocurrency exposure, futures likely boosted market
sophistication over time. Research has also shown several factors can impact the
hedging effectiveness of these instruments. Market liquidity in both the spot and
futures markets influences the degree to which prices move in tandem. Broader
market sentiment surrounding cryptocurrencies also affects hedging, as does the
macroeconomic environment in terms of interest rates, inflation levels, economic
growth patterns, and periods of recession.
As volumes in these derivative markets increase alongside bitcoin's wider
adoption, their influence on pricing dynamics will likely intensify. Yet regulatory
ambiguity remains challenging to navigate, as befits an emergent asset class. If
oversight frameworks can proportionately balance market integrity, consumer
protections and technological innovation, futures may further aid liquidity and
transparency. This could reinforce bitcoin's potential as a viable store of value and
medium of exchange on a larger scale.
Looking ahead, as cryptocurrency technology and markets continue maturing
rapidly, further research is still needed. More data will elucidate the complex
interactions between regulated derivative products and their underlying spot markets.
Factors like infrastructure changes, new entrants and use case developments may
also reshape how these instruments impact cryptocurrency volatility and efficiency.
As analysis deepens on both short-term price effects and longer-term trends,
policymakers and investors can better optimize the role of bitcoin futures in realizing
decentralized finance's ambitious promises. Overall, the launch of these pioneering
derivatives marked an inflection point, but their ultimate viability remains to be seen
as technological and regulatory change proceeds apace.
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