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DOGE · 18w

Fed Explains The Bitcoin Crash: What Were They Thinking?

I heard a really dumb idea the other day.  In fact, it was so ridiculous that I wanted to just laugh it off and forget about it.  But because it involved something that cost real money and that money was paid by taxpayers like you and me, I had to share it.  OK, so here we go.

On Monday, the Federal Reserve Bank of San Francisco and a Stanford University professor released a report concluding the launch of bitcoin futures last December contributed to the ensuing price collapse.  

With all respect due the brilliant minds that are nestled into Stanford or the San Francisco Fed, this is more than just far fetched stuff. Quite frankly, it is junk.  The advent of futures trading in bitcoin had as much to do will falling bitcoin prices as the swallows returning to Capistrano: totally ridiculous.

A Few Facts

After reading through the report, I realized that much of their conclusion was based on a favorite tool of statistical research: correlation.  Bitcoin futures trading began on December 10, about the time that the price peaked on December 18th at just over $19,000. Drawing from the Fed’s data bank showed how other asset prices corrected when future contract trading was started.  For them, that was enough to prove their case.

Birds flying north correlate almost 100% to the arrival of  spring. But they don’t cause it. Here are just a few facts to illustrate the lack of cause and effect.  In the first month of bitcoin futures trading, reports were coming from all over of the sheer lack of volume in bitcoin futures.  In fact BarChart.com shows the CME traded a measly 932 contracts while the CBOE handled 3,887. Of that total some 2,828 contracts were still “Open Contracts” on December 29th.

Open interest measures how many contracts had been bought but not sold during the period. In other words, not only was there almost no interest in bitcoin futures but more than half remained open at the end of the mont...

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