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Extreme Bitcoin Volatility Because of Bitcoin Futures Expiration

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The Bitcoin market experienced extreme volatility on 19 September 2018. (Check chart) It drop from USD 6,300 to USD 6,150 in an hour. It rised up to USD 6,550 in only half an hour, then it drop again to USD 6,400 before stabilizing. This crazy Bitcoin price volatility event happened the same month of Bitcoin futures contracts expiration on the CBOE. It is likely that this was the cause of this volatility.

 

How This Happens

Thomas Lee, Head of Research at Fundstrat Global Advisors. Proffer that the expiration of monthly futures contracts on Bitcoin futures exchanges in Chicago, leads to market volatility. Lee found that on average, from five months of data. Bitcoin’s price drops about 15% in the ten days that led up to futures contract expiration.

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The gear behind this is traders use Bitcoin futures to create short positions. So they make money if Bitcoin’s price drops. Also they hold actual Bitcoins, and then sell those Bitcoins before futures contract expiration to drive Bitcoin’s price down, so they increase their short profits. This event on 19 September is a nice proof of his theory. Since price crashed right before the futures contracts expired, suggesting someone in a short position was trying to drive spot price down at the last minute to make quick profits.

There are 2 potential reasons for the rally that quickly followed the crash. Perhaps once the Bitcoin futures contracts expired, the investors who sold their Bitcoins bought them back, driving price up. In addition, the Relative Strength Index (RSI) briefly dropped below 30 during the crash, indicating oversold conditions. This is a relatively rare occurrence for Bitcoin. Other traders and investors who use the RSI to make decisions probably saw this and quickly bought Bitcoin during the time RSI was below 30.

The combination of futures traders buying back Bitcoin, and other traders buying Bitcoin due to the oversold RSI, actually drove RSI up to 68 for a moment, just below the overbought threshold. Some of the same traders who make decisions with RSI might have sold at this point, leading to the slight price drop back to USD 6,400.

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