Study finds CME drives Bitcoin price, but it excludes stablecoin volumes

Data from Wilshire Phoenix suggests BTC price formation is driven by CME Bitcoin futures but would this dynamic differ if stablecoin volumes were also included?

On Oct. 14, Wilshire Phoenix investment firm released its Efficient Price Discovery report, which detailed how CME Bitcoin (BTC) futures impact Bitcoin price discovery.

The firm concluded that “CME Bitcoin futures contribute more to price discovery than its related spot markets.” And the researchers also suggested that:

“CME Bitcoin futures have grown to become significant, this is not only demonstrated through trading volume and open interest, but also by influence on spot price formation.”

Wilshire’s analysis correctly states that price discovery in traditional markets is a contested topic. The report also adds that studies on price formation often find that the futures markets lead most of the time, but this doesn’t mean their conclusions about CME Bitcoin futures are absolute.

According to the report, CME Group, the leading derivatives venue, trades $5.15 trillion per day across its multiple markets. According to Nasdaq data, this number compares to the $430 billion in daily volume seen in the U.S. stock market.

This data shows that the trend of derivatives volumes surpassing spot exchanges by tenfold is the norm rather than an exception.

The CME index is missing key ‘ingredients’

U.S. Securities and Exchange (SEC) documents show that In June, Wilshire Phoenix filed for a publicly tradable Bitcoin-backed fund similar to the Grayscale Bitcoin Trust.

It is important to note that the Bitcoin held by Wilshire’s fund will follow a BTC price index called the Bitcoin Reference Rate (BRR) listed by the CME.

In the report, Wilshire Phoenix explained that the CME Bitcoin Reference Rate (BRR) is used to determine the price on which BTC futures contracts are cash-settled in U.S. dollars.

CME Bitcoin Reference Rate constituents. Source: Wilshire Phoenix

For CME and aspirant funds based in the U.S., it might make sense to exclude stablecoin volumes and focus on more regulated exchanges. Even if Bitcoin price discovery does not happen there, arbitrage efficiency has grown over the years, according to a 2019 Bitwise Investments report.

Analysis from Bitwise found that “arbitrage between these ten exchanges is virtually perfect.” Therefore, by not having sustained price discrepancies, the CME reference index can comfortably select a handful of exchanges, excluding the top three.

Although the latest Bitwise Bitcoin ETF proposal has been withdrawn, its price formation was different from its competitors. Using a broader base, it also included stablecoin based exchanges.

Bitwise Bitcoin ETF proposal, March 2019. Source: Bitwise Investments

Those familiar with cryptocurrency markets will know that stablecoin market caps, trading volumes, altcoin pairings, and their impact on the crypto market have increased immensely over the past two years.

Not only has the stablecoin market capitalization risen eightfold to $21 billion in the past two years, but the dominance of stablecoin pairs and their trading volumes have also grown significantly.

Messaris Bitcoin Real Volume”. Source:

Take notice of how the top Bitcoin pairs are Tether (USDT) based. Even more worrisome is that the CME excludes the three leading exchanges from the Bitcoin Reference Rate.

The above data leads to a significant difference in exchanges’ selection from more inclusive indexes such as Bitwise’s ‘Real Bitcoin Trade Volume’, Messari’s ‘Real Volume’, and Nomics ‘Transparent Volume’. Regardless of the reasons behind CME’s exchange selection, its BRR index excludes the top three exchanges, according to Messari’s 24-hour data.

Stablecoin impact on price formation has not been tested

Wilshire Phoenix’s report is a step in the right direction, and the study has an impeccable methodology. There is enough evidence to support their conclusion that the CME Bitcoin futures lead price formation compared to regulated USD fiat exchanges.

Although well-executed, the analysis does not disprove that Bitcoin price formation happens on Binance, Bitfinex, Huobi, or OKEx. Institutional investors, principally those based in the U.S., may not be interested in less regulated exchange volumes or Bitcoin pricing in stablecoins, but that does not mean those are irrelevant for the price formation.

As for the retail investor, using a broader set of exchanges and pricing makes more sense to test price discovery for an asset like Bitcoin. This conclusion is not equivalent to stating that CME’s Bitcoin Reference Rate is wrong or easily manipulated.

Are less-regulated exchanges inflating volumes by using market makers and large clients paying barely zero fees? Is Tether’s volatility too high to even consider when attempting to determine whether it impacts Bitcoin price formation in USD? These are all valid questions that warrant further discussion and investigation.

Therefore, a broader evaluation is necessary before concluding whether CME Bitcoin futures have the highest contribution to price discovery.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

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