An Analysis Of Bitcoin Market Reaction When CME Futures Contracts Expire

The Federal Reserve says the Bitcoin Futures on the Chicago Mercantile Exchange (CME) are the reason the Bitcoin bear market began. Indeed, the Dec. 17, 2017 launch date of the CME Bitcoin futures coincided with the beginning of Bitcoin’s crash from $20,000 to as low as $3,100 in December 2018.

This is perhaps due to immense short selling pressure combined with the printing of vast quantities of paper Bitcoins on CME. The Bitcoin futures on CME are operated by Globex, the same organization that suppresses global gold prices via the printing of paper gold on COMEX.

Aside from the long term damaging effects on the Bitcoin market, it seems possible that there are shorter term impacts associated with the expiration of futures contracts. The CME Bitcoin futures contracts for a particular month expire on the last Friday of the month, except if there is a holiday in the United Kingdom or United States. A full list of CME Bitcoin futures contract expiration dates can be found at this link.

This expiration date marks the benchmark used to payout profits and losses, and it is possible that futures traders manipulate the price of Bitcoin to optimize their profits. For example, when short selling, a common practice is “banging the close,” in which traders manipulate the underlying asset’s spot price to drop lower to increase profits from short selling. It is also possible for traders in long positions to manipulate the market to go higher right as the expiration happens, which could perhaps also be called “banging the close.”

In this analysis, Crypto.IQ explores the actual data to see if there is any anomalous activity around the time CME futures contracts expire.

First, the CME Bitcoin futures expiration dates are overlaid on a chart from Bitcoinwisdom.com for the entire year of 2018, and there is an additional line for the launch date on Dec. 17, 2017, which makes it extremely clear that the genesis of the CME Bitcoin futures market had a substantial impact on the Bitcoin market from the very beginning.

 Image courtesy Bitcoinwisdom.com. Bitcoin price in USD top chart, volume in Bitcoins along bottom.

Without doing any deep analysis, it seems that many significant peaks and dips in the Bitcoin market coincide with the CME Bitcoin futures expiration dates. This would suggest there is plenty of banging the close occurring.

Crypto.IQ will analyze each of these CME Bitcoin future settlement dates individually to get a clearer picture. 

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Image courtesy Bitcoinwisdom.com.

The line at the left side of the chart shows the date that CME Bitcoin futures launched, Dec. 17, 2017. The line at the right side (not to be confused with the far right line which is the Y axis) shows the date the first Bitcoin futures contract on CME expired, Jan. 26, 2018.

This contract was an extreme win for short sellers, and despite an attempted rally around the 2018 New Year, the market had declined to $11,000 by the time the contract expired. There is no sign that there is an acute case of banging the close, but perhaps banging the close was not even needed at the expiration since the market fell so hard. It is possible that CME futures traders banged the close all month long.

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The line in the above chart shows the second CME Bitcoin Futures contracts expiration on February 23. In this case, banging the close seems pretty obvious. An attempted bounce-back rally that peaked five days before the expiration was stomped out, and Bitcoin hit a local minima right around the time the contracts expired. Then the rally re-starts and continues into early March.

The February futures expiration date perhaps gives an understanding of how the CME Bitcoin futures can be very detrimental for the market long term. If traders made short sell bets on Bitcoin, but then Bitcoin begins to have a serious rally, they may coordinate to end the rally. In this case, Bitcoin rallied from $6,000 to nearly $12,000, only to crash below $10,000 when the expiration occurred.

Bitcoin then returned exactly to the peak of this rally near $12,000 once the futures contracts expiration was over. The question is, how high would Bitcoin have rallied if there were not people manipulating the spot market to better their short positions on the futures markets?

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The March 29 Bitcoin futures expiration is an excellent example of banging the close. The volume speaks a thousand words, since selling rapidly accelerated and peaked right when the futures contracts for March expired. This futures contracts expiration dropped Bitcoin below $7,000, and it took at least 10 days for the Bitcoin market to recover from this bottom that was likely induced by CME futures-related manipulation. This March expiration is a good example of how a major Bitcoin price crash can be related to the monthly CME Bitcoin futures contracts expiration.

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After the catastrophic Bitcoin futures contracts expiration in March, perhaps many traders thought Bitcoin had bottomed out, and a rally soon started after a 10-day recovery period. The rally continued until the April 27 futures contracts expiration, making it an excellent month for long traders. There is an obvious volume peak 2-3 days before the contract expiration, and a $1,000 price crash. It seems possible that this $1,000 price crash was short sellers banging the close to cut losses and perhaps was mitigated by people in long positions banging the close in the other direction.

The turbulence around the futures contracts expiration perhaps significantly slowed the rally. It re-started a few days after the expiration occurred but quickly lost steam and reversed. This may be another example of a bounce-back rally getting rekt by CME Bitcoin futures-related manipulation, but it is impossible to know for sure.

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Between the April 27 and May 25 CME Bitcoin futures expiration dates, the bounce-back rally was entirely liquidated as short sellers took back the helm. There appears to have been some obvious banging the close activity 3-5 days before the May contracts expired, with high volumes and a $1,000 price crash. The market stopped dropping once the May contracts expired, and was steady until the middle of June.

This brings up another interesting effect of the CME Bitcoin futures. If a crash occurs around the time of contract expiration, then the market usually has some time to ‘relax’ after the expiration. This makes it more clear that banging the close is a serious issue.

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The price of Bitcoin once again crawled lower as the June 29 CME Bitcoin futures contract expiration approached and reached a minimum below $6,000 within about a day of the expiration. After the expiration was complete, the market “relaxed” and rallied off lows. The June expiration once again has the tell-tale signs of banging the close.

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Short selling and banging the close lower is not the only option, and perhaps not a good option once Bitcoin has fallen too much. Prior to the July 27 expiration, the market had been rallying, and the rally peaked over $8,000 around the time the expiration occurred. Then the market began declining within days after the July contract expired. This could be a good example of CME futures traders going long, and perhaps helping Bitcoin’s price to go higher. Once they got their long profits, then they may have collectively decided it was time to squeeze money out of short selling again. The timing of the peak of this rally seems too exact to be a coincidence.

After the July expiration, the market crashed below $6,000 and then began to steadily rise, probably from an overall consensus that the Bitcoin price was near its support level, and it was a good time to buy. There is no sign of banging the close to stop the slight rally when the Aug. 31 expiration occurred. It is important to note that short sellers would have still had nice profits since overall Bitcoin declined $1,000 during August.

A few days after the August contracts expired Bitcoin crashed hard, just like what happened days after the July contracts expired. This brings up the possibility that CME futures traders are doing far more than banging the close. They may be preemptively banging the market right after they buy their monthly contracts, which would cause market panic, widespread selling, and far lower prices than they could achieve from their own manipulation.

After the hard crash right after the August expiration, the Bitcoin market went sideways. There is signs of banging the close around the September 28 expiration since volume increased and price dipped right as the expiration occurred. Overall, September was another good month for CME short sellers.

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The trend in October was very flat, and when the expiration happened on Oct. 26, there wasn’t much action. There was almost no change in price during October, and this may have created an environment where an equal amount of longs and shorts were present, and much fewer positions overall. Perhaps when the market does not move much in either direction banging the close does not happen.

November will go down as one of the worst months in 2018 for Bitcoin and the crypto market, however. The Bitcoin Cash fork around Nov. 14 coincided with a crash below Bitcoin’s $5,800 support level. The SEC issued devastating enforcement actions against Paragon (PRG) and Airfox (AIR) and said that would be the protocol for ICO enforcement going forward. Further, Bakkt delayed the launch of physical Bitcoin futures, which is something many investors were looking forward to.

One thing ignored by most people’s market analysis of this crash is that the CME futures traders probably placed large short sell positions and perhaps manipulated the market to crash harder than it should have. The market stopped crashing 4 days before futures contracts expired on Nov. 30, and there appears to be a nice $400 price dip right before the November contracts expired.

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Zooming in on the Nov. 30 contracts expiration makes it obvious that the close was banged to lock in maximum short selling profits for November.

The December 2018 CME futures contracts expire on Dec. 28, and in 2019, the schedule is Jan. 25, Feb. 22, March 29, and June 28. It seems these dates will be important for Bitcoin traders, since as the above analysis shows, the spot market often crashes right when expiration happens on down months, and during up months the rally usually peaks right around the expiration date. Only if the market is totally stable all month, like it was in October 2018, the expiration date does not have much significance.

There is plenty of evidence, based on these charts, that CME Bitcoin futures traders are participating in banging the close to increase their profits. There is also a disturbing trend of the Bitcoin market crashing days after contracts expire. This is perhaps traders who take up short positions for the new month launching their ammunition early to cause a major crash, which is perhaps more profitable for them than the small movements they can cause when banging the close. Multiple bounce-back rallies in 2018 died days after contracts expired, which is likely simultaneous with CME futures traders taking up their short positions.

Another worrisome factor is that any actual bad news, like the Bitcoin Cash fork and SEC enforcement, may be blood in the water for CME futures traders. The November crash ended right before the contracts for November expired, making it seem like the CME futures traders launched their ammunition to crash the market when the market was already crashing due to bad news, greatly amplifying the overall crash.

Perhaps the Commodity Futures Trading Commission (CFTC) should consider that the relatively small size of Bitcoin, which has less than a $100 billion market cap, is inappropriate for Globex futures since it is too easy to manipulate.

 

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