This article was originally published here.
If past is prologue, Bitcoin could drop another 10% this week.
Bitcoin futures contracts at the Chicago Mercantile Exchange (CME) are set to expire this Friday, and the crypto outlet Trustnodes expects the event will trigger a sharp and likely temporary drop in the price of BTC.
It’s a pattern that’s held firm since May.
“There are few things more predictable in bitcoin than price will fall before the last Friday of the month when futures expire, and that price will rise after it.
Maybe one day this prediction will be wrong, but the master manipulators have like clockwork delivered every month.”
CME’s Bitcoin futures contracts are cash-settled, which essentially allows people to place a side bet on the price of BTC.
According to researchers, traders with big enough Bitcoin holdings could try to influence the price in the futures market by buying and selling Bitcoin on spot exchanges.
The American Finance Association analyzed the potential for manipulation of cash-settled futures products and found that a “nontrivial” amount of shenanigans can occur.
“Without ‘physical delivery,’ strategies based on ‘corners’ or ‘squeezes’ are infeasible. However, uninformed investors still earn positive expected profits by establishing a futures position and then trading in the spot market to manipulate the spot price used to compute the cash settlement at delivery. We also show that as the number of manipulators grows, profits from manipulation fall to zero.
However, even in the limit, manipulation still has a nontrivial impact on market liquidity. More broadly, we interpret manipulation as a form of endogenous ‘noise trading’ which can arise in multiperiod security markets.”
In a note to clients back in June, Fundstrat’s head of research Tom Lee confirmed that Bitcoin’s price has often plummeted as the expiration date approaches.
“Bitcoin sees dramatic price changes around CBOE futures expirations. This was something flagged by Justin Saslaw at Raptor Group. We compiled some of the data and this indeed seems to be true. Overall, bitcoin has fallen 18 percent in the 10 days prior to CBOE contract expiration.”
The two exceptions to the rule were in February, which Lee believes is connected to tax season, and in April, when the price of BTC first began its 2019 bull run after hitting a low of about $3,150.