Are bitcoin futures contracts for hedging or speculation?


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The emerging interest in Bitcoin futures market has led to questions on its trading form and contribution to risk minimization. These questions are important for market participants, including hedgers and speculators. This paper addresses the possible trading motive in Bitcoin futures market in being speculation or hedging. The author first tests a model relating Bitcoin futures returns with trading volume and conditional volatility, estimated with a GJR-GARCH specification, on a full sample of daily futures prices. A robustness check is then conducted by investigating the hedging effectiveness of Bitcoin futures and the speculation-hedging ratios on individual Bitcoin futures contracts. The estimation results on Bitcoin futures contracts, spanning from December 2017 to February 2020, show a significant positive relationship between futures returns and lagged volume. The speculation-hedging measures used for Bitcoin futures contracts maturing in March, June, September, and December reveal an increasing demand for speculation. Also, the Bitcoin spot’s full-hedge and OLS-hedge strategies with Bitcoin futures provide no gain over a no-hedge strategy. The results reveal strong evidence that traders in the Bitcoin futures market are motivated by speculation rather than hedging. This further puts in evidence the existence of asymmetric information within informed traders in Bitcoin futures market, and therefore market participants would not insure their positions against Bitcoin price movements.

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    • Figure 1. Bitcoin futures contracts returns, volume, and open interest
    • Figure 2. Speculation-hedging ratios for Bitcoin futures contracts
    • Figure 3. Bitcoin spot and futures returns
    • Table 1. Descriptive statistics
    • Table 2. Estimation results
    • Table 3. Hedging Bitcoin spot with Bitcoin futures
    • Table 4. Speculation-hedging demand measures
    • Conceptualization
      Ramzi Nekhili
    • Data curation
      Ramzi Nekhili
    • Formal Analysis
      Ramzi Nekhili
    • Investigation
      Ramzi Nekhili
    • Methodology
      Ramzi Nekhili
    • Validation
      Ramzi Nekhili
    • Writing – original draft
      Ramzi Nekhili
    • Writing – review & editing
      Ramzi Nekhili