Bitcoin price fluctuations: a true reflection of futures spreads

In recent years, Bitcoin, as a digital currency, has experienced unprecedented fluctuations in the financial market. This fluctuation has not only attracted widespread attention from investors, but also attracted in-depth research from economists and market analysts. Many people have begun to explore whether the sharp fluctuations in Bitcoin prices are related to the spread in the futures market. So, what is this relationship? This article will analyze this phenomenon in depth from multiple angles to reveal the deep reasons behind Bitcoin price fluctuations.

Bitcoin price fluctuations are often regarded as a direct reflection of market sentiment. Investors' optimism and pessimism alternate, causing Bitcoin prices to fluctuate sharply in a short period of time. This fluctuation is not only reflected in the spot market, but also in the futures market. Futures contracts are investors' expectations of future asset prices, so there is often a price difference between their prices and spot market prices. With the increasing popularity of Bitcoin, the influence of the futures market is increasing, and the expectations and emotions of market participants are constantly changing.

In order to better understand the internal logic of Bitcoin price fluctuations, we need to pay attention to the basic mechanism of the futures market. The price of futures contracts is determined by the market supply and demand relationship. If the market is optimistic about the future price of Bitcoin, the price of futures contracts will often be higher than the spot price, and vice versa. The existence of this price difference is precisely a reflection of the market's uncertainty about future prices. Take 2017 as an example. The price of Bitcoin once soared to nearly $20,000 at the end of the year, but it was followed by a sharp price correction. The sudden change in market sentiment caused the price of futures contracts to fluctuate, and eventually formed a situation of mutual influence.

In addition, market liquidity is also an important factor affecting price fluctuations. The liquidity of the Bitcoin market is relatively low, especially when market sentiment is high, investors' buying demand will quickly amplify price fluctuations. With the introduction of the futures market, more investors began to participate in transactions. This increase in liquidity helps to smooth price fluctuations. However, in some cases, it will cause greater fluctuations due to the collective behavior of investors. For example, in May 2021, the price of Bitcoin plummeted from nearly $60,000 to $30,000, and the price of futures contracts during the period also fell sharply, showing extreme changes in market sentiment.

In addition to market supply and demand and liquidity, technical analysis is also an important tool for understanding Bitcoin price fluctuations. Many investors use technical analysis tools to predict price trends, forming a self-fulfilling prophecy. If most investors use the same technical indicators, the market may generate consistent buy and sell signals, further amplifying price fluctuations. For example, when the price of Bitcoin breaks through a key resistance level, many investors will choose to follow up and buy, causing the price to rise further, forming a "herd effect". This phenomenon is particularly evident in the futures market, where a surge in the purchase volume of futures contracts often leads to an increase in spot prices, forming a positive feedback loop.

In the Bitcoin market, news is also an important factor affecting price fluctuations. Policy changes, technological advances, and the dynamics of market participants can have a profound impact on the price of Bitcoin. For example, a government's announcement of a regulatory policy on Bitcoin transactions may cause panic in the market and cause a sharp drop in prices. On the contrary, a well-known company's announcement of acceptance of Bitcoin payments may stimulate market optimism and drive prices up. This kind of news impact also exists in the futures market, where market participants' expectations for the future are often adjusted based on the latest news, thus affecting the price of futures contracts.

It is worth noting that the volatility of Bitcoin prices is not only a reflection of market sentiment and futures spreads, but it is also closely related to investor behavior. Many investors tend to make irrational decisions when faced with price fluctuations. For example, fear and greed are two common emotions that often lead investors to chase high prices and sell at low prices. Such behavior not only exacerbates market volatility, but may also cause the price of the futures market to deviate significantly from the spot price.

In such a market environment, investors need to remain rational and avoid being swayed by short-term fluctuations. An effective risk management strategy can help investors stay calm in the face of price fluctuations. For example, setting stop-loss points, diversifying investments, and regularly evaluating investment portfolios are all effective risk management methods. In addition, investors should also pay attention to changes in the fundamentals of the market, rationally analyze the intrinsic value of Bitcoin, and avoid making wrong decisions due to market sentiment fluctuations.

In the long run, the relationship between the volatility of Bitcoin prices and the spread in the futures market reflects the market's expectations of future uncertainties. As the market matures and the number of participants increases, this volatility may gradually decrease and prices will stabilize. However, in the current market environment, investors still need to remain vigilant, rationally analyze market dynamics, and make wise investment decisions.

In short, the volatility of Bitcoin prices is indeed closely related to the spread in the futures market. The combination of market sentiment, supply and demand, liquidity, technical analysis, news, investor behavior, and other factors has led to the sharp fluctuations in Bitcoin prices. In such a market environment, investors need to remain rational, avoid being affected by short-term fluctuations, and protect their investments through effective risk management strategies. In the future, as the market develops further, the fluctuation of Bitcoin prices may stabilize, but before that, investors still need to pay close attention to market dynamics and make wise investment decisions.

The four most famous international exchanges:

Binance INTL	OKX INTL	Gate.io INTL	Huobi INTL
China Line　APP DL	China Line　APP DL	China Line　APP DL	China Line　APP DL

Note: The above exchange logo is the official website registration link, and the text is the APP download link.

As long as there is interest, there will be people who manipulate prices. Bitcoin was originally created as a trading tool to get rid of fiat currency, but now it has become a speculative asset. Institutions such as the Chicago Mercantile Exchange (CME), the Chicago Board Options Exchange (CBOE), and Grayscale have developed products based on Bitcoin price changes to serve investors who do not want to take risks.

Among these products, CME Bitcoin futures products are more popular. In the past June, the volume of open contracts hit a record high and the number of new account registrations also surged. According to the latest data, more than 2,960 accounts have traded Bitcoin futures contract products at CME so far. In the first half of 2019 alone, more than 950 accounts were added, and the total customer registration increased by more than 30%.

As shown in the above figure, the open interest of CME Bitcoin futures has been steadily rising, reaching a record high of 6,069 contracts by the end of June 2019, indicating strong market demand.

(Note: Open interest refers to the total number of derivative contracts that have not yet been settled, so it is open).

Bitcoin futures are attractive in their own right, and are also a tool to help traders understand the correlation between Bitcoin spot prices and futures markets. As Gareth MacLeod, partner at Gryphon Labs, an open source framework for algorithmic trading in cryptocurrencies, said, the growth of Bitcoin futures is a sign that the traditional financial industry is beginning to take a greater interest in the crypto industry, and CME Group is creating a forward curve for the cryptocurrency market so that investors can better manage prices. Given the concerns of traditional financial institutions about the high volatility of cryptocurrency prices, futures contracts can better provide stability, reliability and reduce risks when it comes to large portfolios.

Unlike traditional stock markets, Bitcoin and other cryptocurrencies are traded all year round, while CME's Bitcoin futures products are only traded five days a week: starting at 5 pm Central Time on Sundays and ending at 4 pm on Fridays - this is where the problem lies. Due to the time interval between spot and futures trading, price differences will occur, and these price differences need to be "filled" with spot prices.

As shown in the figure above, every time Bitcoin futures trading is suspended, there will be a price gap (marked with circles in the figure above), and these price gaps need to be filled by the spot price (circles of the same color in the figure above fill the corresponding price gaps). Bitcoin trader Joe McCann explained this situation: "Generally speaking, the trading price reflects all the potential price ranges available between buyers and sellers, so that the true value of the asset can be more accurately assessed. This may be a bit difficult to understand. In fact, in many cases, the price gap between futures prices and spot prices will continue to narrow until it gradually disappears (because of short selling), and then rebounds higher. In traditional markets, "trading experts" (humans) will do this deliberately because they usually manipulate market prices for their own interests. As long as the futures price is long enough, the price gap between it and the spot will eventually be filled." As Joe McCann said, as long as there is interest, there will be people to manipulate market prices, and sometimes they are not even willing to wait "long enough" to fill the price gap, which seems to be one of the reasons for the frequent fluctuations in Bitcoin prices. Let's continue to analyze the recent Bitcoin price trend chart above, taking the recent period as an example: the price gap on June 23 was filled on July 2 (two purple circles in the above picture), and the price gap formed on June 29 and 30 was filled on July 4 (two yellow circles in the above picture). Assuming that all price gaps will be filled, the next "available price gap" in the above picture is the price gap of up to $1,000 from $8,500 to $9,500 around June 17. If nothing unexpected happens, this price gap will be filled in the near future - but obviously, no one knows the exact time.