Bitcoin bubble of 2017 was deliberately popped, former CFTC chair says

Was it deliberate, or is this a case of taking credit for something that would have happened anyway?

The Trump administration deliberately popped the $20,000 Bitcoin bubble of 2017, according to former Commodity and Futures Trading Commission (CFTC) chairman Christopher Giancarlo, much to the chagrin of the "Bitcoin is beyond the reach of any government, bro" crowd.

It did this by allowing the launch of Bitcoin futures on CME and Cboe, he said.

"One of the untold stories of the past few years is that the CFTC, the Treasury, the SEC and... Gary Cohn (the National Economic Council director at the time) believed that the launch of bitcoin futures would have the impact of popping the bitcoin bubble. And it worked," Giancarlo said.

It was a decision borne out of lessons learned in the 2008 financial crisis, when regulators copped a lot of "legit" flak for allowing the real estate mortgage bubble to inflate the way it did, he added.

However, by accepting that CME and Cboe Bitcoin futures trading popped the bubble, you also run into some interesting factoids.

Short memories

For it to be true, we have to accept that existing Bitcoin shorting platforms weren't able to pop the bubble, because CME and Cboe definitely weren't the first place to short Bitcoin.

BitMEX was founded way back in 2014. But maybe Cboe and CME were the first to offer regulated Bitcoin trading platforms? Kind of.

eToro is regulated by the UK Financial Conduct Authority (FCA) and Cyprus Securities and Exchange Commission, and it's offered Bitcoin CFDs, which allow short selling, since 2014. In fact, it was marvelling at an incredible 4,500% 12-month growth Bitcoin CFD trading in April 2017, more than 6 months before CME and Cboe Bitcoin futures launched.

So for some reason that couldn't pop the bubble either, maybe because eToro is more oriented towards retail traders so your sophisticated Wall Street bubble-poppers would have been too embarrassed to be seen trading among the masses.

Plus, at the time CME and Cboe started offering futures under a self-certifying arrangement, which was blasted as unreasonably risky by the Futures Industry Association, and the CFTC was actively warning that cryptocurrencies as a whole were pretty tough to regulate. CME and Cboe weren't exactly jumping out as the only "safe" options in the world.

But apparently there was still something magical about CME and Cboe that made them the perfect bubble poppers?

It probably wasn't the volume.

On CME, the first week of futures trading saw volumes of only 12,000 BTC, relative to the estimated spot market turnover of 200,000 BTC in the same time period. Meanwhile, Cboe's highest volumes of that rough bubble period didn't arrive until 17 January 2017, when Bitcoin had already dropped to $10,000. That record stood until 27 April when 19,000 Bitcoin futures contracts changed hands, with a net bullish sentiment.

Cboe futures were also sitting around with thin volume for a full week before CME joined the market, at which point they increased. It's not as though CME and Cboe opened the floodgates for a world of people hungry for Bitcoin shorts.

And when the bubble popped, prices didn't collapse overnight, as would be consistent with the idea that CME and Cboe Bitcoin futures were a needle to the bubble.

Long shots

Researchers, even while arguing in favour of the theory that CME and Cboe futures were the bubble-popper, concede that there are some tricky questions.

"Why... did the price of Bitcoin fall somewhat gradually rather than collapse overnight? The answer to this is difficult. It could be that pessimistic investors lack the attention, willingness, or ability to enter the market on the first day or week of trading," some economists have hazarded.

Maybe the Bitcoin bubble popped because it was obviously a ridiculous price, rather than because a small number of people were suddenly able to short Bitcoin without owning the underlying asset? Prices fall because people who have Bitcoin sell it, not because a bunch of people on the sidelines are punting on a drop without touching the asset itself.

Shorting itself is in a weird place too. The question of whether short selling itself should be banned is an ongoing debate. Here Giancarlo says they popped the Bitcoin bubble following because they wanted to avoid a GFC-style mortgage bubble, yet naked shorting actually was banned following the GFC when it started facilitating price discovery a little too well.

Specifically, it was because people kept piling shorts on Lehman Brothers and Bear Stearns at an inconvenient time. It was fair price discovery, but it wasn't useful.

But in the case of Bitcoin, which generates no revenue and whose value is held aloft solely by a collective delusion (not unlike Lehman Bros and Bear Stearns), there's arguably no right or wrong way of pricing it. So at what point can you say it's a bubble, and who should be rightly responsible for popping it?

If you accept that the Trump administration did pop it, then that's pretty hard evidence that it's no more immutable than any other financial product.

Either way, there are a lot of ineffable market-type things going on here that no one really understands.

Maybe CME and Cboe Bitcoin futures did pop the bubble in their own mysterious way, maybe it's just a case of regulators happily taking credit for something that would have happened anyway, or maybe it's a bit of both.

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Disclosure: The author holds BNB, BTC at the time of writing.

Picture: Shutterstock