On June 14, Bloomberg reported that according to Tom Lee, Head of Research at Fundstrat Global Advisors, the decline in Bitcoin (BTC) price is the result of the expiration of Bitcoin futures. The Bitcoin drop of 20 perfect this earlier this week, has been the results of future contracts ending and holders pushing down the price for some handsome profits.
To explain: futures are an agreement to buy or sell and an asset on a specific future date at a specific price. Once the futures contract has been entered, both parties have to buy and sell at the agreed-upon price, irrespective of what the actual market price is at the contract execution date.
According to Lee, a drop of 18 percent in 10 days before the preceding expiration is seen on average. After six days the prices generally show a recovery. Lee explained that if a trader is long on Bitcoin and short the futures, holders may sell large shares of BTC at the volume weighted average price as contracts move closer to expiring. Close to the agreed expiration date however, holders often sell the remaining Bitcoin, which causes the price to drop and leaving the short position in the futures they close.
“Bitcoin sees dramatic price changes around CBOE futures expirations… We compiled some of the data and this indeed seems to be true.”
Furthermore, Lee said that the recent “gut wrenching” weakness in Bitcoin, which dropped as much as 20 percent earlier this week, may be due to the expiration of futures linked to the cryptocurrency. At the same time, Lee wrote “inflows into crypto have been insufficient, noting there’s more net supply this year amid initial coin offerings, mining rewards, and capital gains taxes, while absorption has been hampered by slow progress on creating institutional tools”.