An Investigation into the Interactions Between the Bitcoin Spot and Futures Markets

Amanda Crabo & Sophia J. J. M. van Bon

Student thesis: Master thesis

Abstract

This thesis explores whether the spot or the futures market drives the price of bitcoin, using bitcoin spot prices from the exchange Bitstamp and CME bitcoin future from February 2019to March 2020. In particular, various econometric methods within the scope of cointegration theory are applied to examine the long-run relationship and the short-term dynamics between the bitcoin spot and futures market. Subsequently, conventional measures from the literature on price discovery are employed to investigate the responsiveness of each market to new information about the fundamental value of bitcoin.
Overall, it is concluded that it is the bitcoin spot markets that drive the price of bitcoin. The analysis confirms the presence of a cointegrating equilibrium relation between the markets, in line with financial theory on the ‘law of one price’. Moreover, analyses concerning short-term dynamics suggest the bitcoin futures market adjusts more to disequilibria than the bitcoin spot prices, and that innovations to the bitcoin spot price explain the variation in both price series, with a few hours lag. Lastly, we find evidence that suggests that price discovery almost exclusively takes place in the spot market.
The main academic contribution of this thesis is that it develops knowledge regarding the information flows between and price discovery processes of bitcoin spot and futures markets. It is unique in that it applies a combination of an extensive cointegration methodology with price discovery theory to an hourly data set in the context of bitcoin price series.

EducationsMSc in Advanced Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2020
Number of pages126
SupervisorsLisbeth la Cour