Wilshire Phoenix data suggest that BTC prices are influenced by Bitcoin CME futures, but would this dynamic be different if stablecoin volumes were also included?
On October 14, Wilshire Phoenix published its Efficient Price Discovery report, which details how CME’s Bitcoin futures (BTC) impact Bitcoin price discovery.
The company concluded that „CME Bitcoin Rush review contribute more to price discovery than their respective spot markets“. And the researchers also suggest that:
„CME Bitcoin’s futures have grown and become significant, this is demonstrated not only through turnover and open contracts, but also by the influence on spot pricing“.
Wilshire’s analysis states that price discovery in traditional markets is a contested topic. The report also adds that price formation studies often find that futures markets lead the majority of the time, but this does not mean that its conclusions on WEC Bitcoin futures are absolute.
According to the report, CME Group, the leading derivatives exchange, trades $5.15 trillion a day in its various markets. According to Nasdaq data, this figure is compared to the US$ 430 billion in daily volume on the US stock exchange.
These data show that the trend of derivative volumes exceeding cash exchanges by ten times is a norm, not an exception.
WEC Index does not consider ‚ingredients‘ important
U.S. Securities and Exchange Commission (SEC) documents show that in June, Wilshire Phoenix filed a request for a Bitcoin publicly traded fund similar to the Grayscale Bitcoin Trust.
It is important to note that the Bitcoin held by the Wilshire Trust will follow a BTC price index called the Bitcoin Reference Rate (BRR) listed by CME.
In the report, Wilshire Phoenix explained that the CME Bitcoin Reference Rate (BRR) is used to determine the price at which BTC futures contracts are settled in cash in US dollars.
Constituents of the CME Bitcoin Reference Rate.
For CME funds and other U.S.-based applicants, it may make sense to exclude stablecoin volumes and focus on more regulated exchanges. Even if the discovery of Bitcoin’s price does not happen at these locations, the efficiency of arbitrage has grown over the years, according to a 2019 Bitwise Investments report.
Bitwise’s analysis found that „arbitrage between these ten exchanges is virtually perfect“. Therefore, because it has no sustained price discrepancies, the CME benchmark index can comfortably select a handful of exchanges, excluding the top three.
Although the last proposal of the Bitwise Bitcoin ETF was removed, its price formation was different from its competitors. Using a broader base, it also included stablecoin-based exchanges.
Bitwise Bitcoin ETF proposal, March 2019.
Those familiar with the crypto markets will know that the market limits of stablecoin, trading volumes, altcoin pairs and their impact on the encryption market have increased immensely over the past two years.
Not only has stablecoin’s market capitalization increased eightfold, to $21 billion in the last two years, but stablecoin pairs‘ dominance and trading volumes have also grown significantly.
Bitcoin „Real Volume“ by Messari.
Note how the main Bitcoin pairs are based on Tether (USDT). Even more worrying is that CME excludes the three main exchanges from Bitcoin’s Reference Rate.
The above data lead to a significant difference in the selection of the most inclusive index exchanges, such as Bitwise’s ‚Real Trading Volume‘, Messari’s ‚Real Volume‘ and Nomics‘ ‚Transparent Volume‘. Regardless of the reasons behind the CME exchange selection, its BRR index excludes the three main exchanges, according to 24 hour Messari data.
Impact of stablecoins
The Wilshire Phoenix report is a step in the right direction, and the study has an impeccable methodology. There is sufficient evidence to support his conclusion that CME’s Bitcoin futures lead the way in pricing compared to regulated fiat exchanges in USD.
Although well executed, the analysis does not prevent Bitcoin pricing from happening at Binance, Bitfinex, Huobi or OKEx. Institutional investors, especially those based in the US, may not be interested in less regulated exchange volumes or Bitcoin prices in stablecoins, but this does not mean that these are irrelevant to price formation.