The Future of Futures of Bitcoin — A Historical Perspective

On Oct. 31, 2017, the CME (Chicago Mercantile Exchange Group) announced that it intends to launch bitcoin futures in the fourth quarter of 2017, pending all relevant regulatory review periods.” Most likely this will happen on December 18th 2017. The question that is top of mind for Hodlers, day-traders, and people sitting on the sidelines across the Globe is:

“What will happen to Bitcoin after it gets listed on the futures exchange on CME?”

One camp argues that it will be the end of the Bitcoin Mania while another camp argues that this is just the beginning, and Bitcoin will “go to the Moon”.

At the end of the day, either could happen but I argue that other factors outside of Bitcoin Futures being created will have more of an impact on what happens to the price of Bitcoin. Furthermore, I believe that short-term players will be at a disadvantage vs. long-term HODLers.

Now, what will happen when Bitcoin Futures get created on the CME?

To answer this question, I spent some time looking at historical data to try to understand the effect on price when the CME (which was created back in 1898) first listed various metals such as Gold, Silver, & Platinum. There are some limits to this analysis, I admit, but these are interesting data points to consider.

The one caveat to this analysis is that the behavior of hedge-funds, traders, market manipulators, and other institutional investors is quite hard to predict with futures, so please keep this in mind as you read below.

Lastly, remember that correlation does not imply causation #uchicago.

First let us take a look at Gold. From the ancient Egyptians, Greeks, and Romans to the 1849 California Gold Rush to present day, gold has always been a valuable asset. The price of gold has fluctuated throughout history, and interestingly enough the CME first offered Gold Futures on 12/31/1974 (i.e. 1/2/1975). Given we have both prices and dates of gold for this time period, let’s take a look to see what happened to “Gold Prices” after “Gold Futures” were launched on CME.

Historical Gold Prices (Not adjusted for Inflation); Souce: USA Gold

Looking at the chart above, it looks like immediately after the ‘Gold Futures’ were launched there was a small bump in ‘Gold Prices’, but a year later gold prices fell, and 5-years afterwards gold was back up (higher than 1/2/1975). But this only tells part of the story. Here is what the overall Gold Price chart looks like from 1968 to 1998 (by Earle B. Amey):

[The yellow highlighted area is when CME launched Gold Futures.]

Annual Average Gold Price (not adjusted for inflation)

Looking at the long-term view, when the CME launched futures on gold, it had little or no effect on the price of gold. In fact, the spikes for the price of gold had more to do with the political environment and instability during certain time periods than the creation of gold futures. For example, consider the following international & political events:

  1. 1970 — Mild US recession
  2. 1973 — The 1973 Oil Embargo
  3. 1978 —Middle East increases in gold purchases
  4. 1979 — Soviet / Afghanistan Invasion
  5. 1987 — Black Monday i.e. Stock Market Crash of 1987

These events had much more impact on Gold prices than CME simply adding ‘Gold Futures’ to their exchange. So long-term the CME futures had very little impact on gold prices vs. other international / geo-political events.

Thanks to USA Gold & the ICE Benchmark Administration and London Bullion Market Association, we have daily gold prices going back even before 1974. Let us dig a bit deeper and try to understand what happened with gold prices between 1974 & 1975 i.e. short-term view. The Gold Futures were launched in the end of December of 1974. The yellow highlighted area is when Gold Futures were launched by the CME.

Gold Short-Term Prices (not adjusted for inflation); Source: USA Gold
  1. The first graph shows 2 years worth of daily gold prices from 1/1/1974–12/31/1975; as you can see, prior to the Gold Futures being announced, there was a run-up in price followed by downward pressure in price afterwards.
  2. The second graph shows daily gold prices for 1-year after the Gold Futures launched i.e. 1/1/1975–12/31/1975. Again you see that there was a small appreciation in price for gold, followed by a decrease in gold prices by the end of the year.
  3. The third graph shows daily gold prices 2 months before launch and 2 months after launch i.e. 11/1/1974–2/28/1975. Over here you can see a larger run up in gold prices prior to the Gold Futures being created followed up a drop in prices shortly afterwards.
  4. The fourth graph shows daily gold prices 1 month before launch and 1 month afterwards i.e. 12/1/1974–1/31/1975. You can also see a run-up in gold prices right before the “Gold Futures” launch followed by a fall in gold prices right after launch.

Basically, for short term players gold prices did not do so well right after the CME Gold Futures launch; however, after 1977 (i.e. ~2 years after the CME Futures launch) gold prices rebounded and again came to all-time-high levels. This would make sense, given Futures markets are very speculative and can initially have negative implications when first being introduced. (Note: short-term should not be confused with “shorting”)

Next let us take a look at what happened with Silver. Similar to gold, silver has also been a considered a reliable source of wealth savings. Long before gold, the CME created Silver Futures — in fact, on 7/5/1933 the Silver Futures were created on the CME. Although I was not able to find daily prices for Silver dating back to 1933, I was able to find average yearly prices.

Again looking at the data — the trend isn’t apparent and we reach the same conclusion as above for the long-term view, that the CME Silver Futures had very little or no impact on Silver prices.

Here is a chart showing silver prices form 1959–1998 (by Mickey Fulp), with the 1933 time period (launch of Silver Futures) highlighted.

Silver Prices per ounce (not adjusted for inflation)

Again, silver’s price fluctuations had more to do with historical political / international events rather than silver being added to the CME Futures exchange.

  1. 1861 to 1865 — U.S. Civil War
  2. 1929 — Stock Market Crash
  3. 1945 — End of WWII

Although not as popular to the general public, platinum is actually another important metal and is currently ~55x the price of silver. Interestingly enough, Platinum is even rarer than both gold and silver.

Platinum Futures were first listed on the CME on 12/3/1956. Again, I was not able to find daily prices for platinum going back to 1956, but we can use average yearly prices to see if anything jumps out.

And again, looking at the chart above, there does not seem to be a viable trend with regards to price for platinum and ‘Platinum Futures’ being created.

Additionally, looking below at the historical prices chart for Platinum (Henry E. Hilliard) shows us that adding platinum to the futures exchange on CME had minimal effect on the price of platinum versus other political / international events.

Platinum Prices 1940–1998 (not adjusted for inflation)

Now back to Bitcoin, Bitcoin Futures, & The CME

Long Term: So looking back at the long-term view historically for gold, silver, platinum — we see that adding futures for each asset had little or barely any impact on price compared to political, international, and economic events; in fact, these other events were the reasons for major price fluctuations.

Short Term: Given we only have data for gold prices daily, we saw that there was quite a bit of volatility when Futures were introduced. There was a run up to the Gold Futures launch — followed by a dip in prices for about 2 years. After which, gold prices started come back to all time high levels.

Why is this interesting for Bitcoin? Sure, the CME may initially cause Bitcoin to move up or down, but in reality Bitcoin’s price is going to be more dependent on events in the Bitcoin economy. To list a few:

  1. Bitcoin / Crypto Community Politics (e.g. UAHF / UASF)
  2. Institutional Investment
  3. Government rules / regulations
  4. Competing crypto-currencies
  5. Major Bitcoin Conferences i.e. (a guess)

Now, I’m not saying that what happened to gold prices during the CME Gold Futures launch is exactly what is going to happen for Bitcoin. It may be similar or it may be different, but if you are on a long-term time horizon, it will be fine.

Let us go to the moon with patience! At the end of the day, Bitcoin Futures are:

“One small step for Bitcoin, one giant leap for Cryptocurrencies.”

DISCLAIMER: This post is not investment advice. Please don’t make investment decisions based on the information provided here.

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Crescat scientia; vita excolatur ◎ Crypto mad scientist ◎ Analytics @ Flexport ◎ MS Computer Science @penn ◎ Econ @Uchicago .