Price discovery in bitcoin spot or futures?

• Date: 01 July 2019
• Author: Thomas Dimpfl,Dirk G. Baur
• DOI: http://doi.org/10.1002/fut.22004
• Published date: 01 July 2019

Received: 1 May 2018

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Revised: 30 January 2019

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Accepted: 31 January 2019

DOI: 10.1002/fut.22004

RESEARCH ARTICLE

Price discovery in bitcoin spot or futures?

Dirk G. Baur

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Thomas Dimpfl

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Accounting and Finance Department,

University of Western Australia Business

School, Perth, Australia

2

Department of Statistics and

Econometrics, Faculty of Economics and

Social Sciences, University of Tübingen,

Tübingen, Germany

Correspondence

Thomas Dimpfl, Department of Statistics

and Econometrics, Faculty of Economics

and Social Sciences, University of

Tübingen, Mohlstr. 36, 72074 Tübingen,

Germany.

Email: thomas.dimpfl@uni-tuebingen.de

Abstract

In December 2017, both the Chicago Board Options Exchange and the Chicago

Mercantile Exchange introduced futures contracts on bitcoin. We investigate to

what extent they provide useful information for the price discovery of bitcoin. We

rely on the information share methodology of Hasbrouck (1995, JFinance,50,

pp. 1175–1199) and Gonzalo and Granger (1995, JBusEconStat, 13, pp. 27–35) and

find that the spot price leads the futures price. We attribute this result to the higher

trading volume and the longer trading hours of the globally distributed bitcoin spot

market, compared to the relatively restricted access to the US‐based futures

markets.

KEYWORDS

bitcoin, cointegration, futures, information shares, price discovery

JEL CLASSIFICATION

G12, G13, G14

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INTRODUCTION

After a 15‐fold increase of the price of 1 bitcoin from US$1,000 in January 2017 to more than US$15,000 in early

December 2017, the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME) both

introduced futures contracts on bitcoin.

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Until then, price discovery of bitcoin had to take place in spot trading of

bitcoin only, scattered across different, international trading venues. With the introduction of futures contracts,

investors can now access the bitcoin market on a regulated exchange which may eventually broaden the investor base.

A natural question that arises from the trading of futures contracts is to what extent futures on bitcoin contribute to

price discovery. This is the question we seek to answer in this paper, using the information share methodology of

Hasbrouck (1995) and the component shares of Gonzalo and Granger (1995).

The question where price discovery takes place implies a standard market microstructure analysis. However, what

makes this analysis less standard is the fact that there is no consensus about the fundamental price of bitcoin. It is thus

interesting how price discovery evolves given that there is no commonly accepted pricing model of bitcoin. This feature

is shared with gold where the empirical evidence shows that the price is discovered in the futures market (e.g.,

Hauptfleisch, Putninš, & Lucey, 2016; Jin, Li, Wang, & Yang, 2016).

Another feature that makes the setting unique is the fact that bitcoin is designed as a global, decentralized, and

distributed peer‐to‐peer payment system (see Böhme, Christin, Edelman, & Moore, 2015; Nakamoto, 2008). This

design of bitcoin implies that the system cannot be regulated by a single country or a group of countries. While

exchanges can be shut down and the trading of bitcoins may be prohibited in certain countries, bitcoins can still be

held anonymously on the bitcoin network. The decentralized and globally distributed network and the lack of

regulation pose a fundamental difference to the centralized and highly regulated futures market and futures

J Futures Markets. 2019;39:803–817. wileyonlinelibrary.com/journal/fut © 2019 Wiley Periodicals, Inc.

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803

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We follow the convention of labeling the bitcoin system with a capital B, and label the bitcoin currency with a lowercase b.