Cboe, CME Futures Contracts Could Be Playing a Role in Bitcoin’s Weakness

Bitcoin enthusiast Tom Lee examines the role futures contracts could be playing in Bitcoin’s performance.

Could the futures contracts be behind Bitcoin’s declines?

Famed Bitcoin enthusiast Tom Lee thinks so. The Fundstrat head released his latest report on the crypto space on Thursday.

In it, he wrote about the Cboe and CME futures expirations contributing to what he called the "gut wrenching" weakness in Bitcoin. Specifically, he thinks the declines may be due to the expiration of futures linked to the crypto.

Gut wrenching

Cboe and CME futures contracts were launched in December to much fanfare. They were thought to be the keys needed to attract more institutions, and their large investment dollars, to the crypto space.

While that may be true, something has surfaced over the months that gives some observers pause, and this includes Lee. He found that there is “significant volatility" around Cboe and CME futures expirations.

He found that the situation is aggravated by technical factors that he sees as being awful. As the expiration of the contracts nears, Bitcoin’s price seems to fall, according to Lee.

Lee’s findings show that Bitcoin has fallen 18% on average in the 10 days prior to expiration. Then, within six days, the price recovers.

Bloomberg points out about Lee’s report the following:

If a trader is long Bitcoin and short the futures, as contracts move closer to expiry, holders may sell a large share of the coins at volume weighted average price (VWAP) to minimize tracking error. But near expiration, may sell the remaining Bitcoin, causing the price to drop, leaving the short position in the futures to close "with a handsome profit."

Other issues at play

Lee also found that inflows haven’t been enough, which is a problem considering there’s been more net supply this year. The reasons relate to the number of  ICOs in the market, as well capital gains taxes that had to be paid this tax season, according to Lee’s report.

That’s countered by absorption of the supply being slowed because few institutional tools are being created.

Lee maintains a $25,000 price target for Bitcoin to hit by the end of the year.