Bitcoin Price Discovery Shifts to Derivative Markets

Recent academic studies have revealed a significant shift in Bitcoin price discovery, with derivative markets now playing a more pivotal role than spot markets. This transformation is attributed to the increasing financialization of cryptocurrencies, which has led to greater acceptance within the financial system and more institutional investment.

Professor Andrew Urquhart, a leading expert in finance and financial technology, has highlighted that the introduction of Bitcoin futures, options, futures ETFs, and spot Bitcoin ETFs has enabled investors to gain exposure to Bitcoin without the need for direct custody. These derivative assets also facilitate hedging and more sophisticated trading strategies. However, the impact of these derivative products on digital markets has been a subject of intense study.

One key issue is the location of price discovery—whether it occurs in derivative markets or spot markets. Research by Fassas et al (2020) indicates that after the introduction of Bitcoin futures markets on the CME and CBOE, the futures market has become more crucial in incorporating new information about Bitcoin prices, shifting the focus of price discovery to derivative markets. This trend is further supported by studies on unregulated derivative exchanges like BitMEX, which show that their derivative prices lead major Bitcoin spot exchanges and are more informationally efficient, serving as effective hedges against spot price volatility.

Further analysis by Alexander and Heck (2020) reveals that perpetual swaps and futures traded on unregulated exchanges like Huobi, OKEx, and BitMEX are the price leaders, with prices on regulated derivative markets reacting to, rather than leading, price movements on unregulated exchanges. However, recent work by Frino et al (2025) suggests that the futures market generally leads spot markets, though this price leadership exhibits daily fluctuations.

Beyond price leadership, the introduction of Bitcoin derivatives has had a mixed impact on the Bitcoin market. Jalan et al (2021) document a clear downward impact on Bitcoin prices after the introduction of derivatives, but an upward impact on volatility, indicating a detrimental effect. Conversely, recent work by Conlon et al (2024) suggests that CME futures trading volume is not a source of systemic risk, with the majority of risk originating from the spot Bitcoin market.

The introduction of spot Bitcoin ETFs in January 2024 has been a significant development, with emerging literature suggesting a positive impact on not just Bitcoin markets but other cryptocurrencies as well. This is evidenced by increased prices and reduced volatility, supporting the stabilization hypothesis. A detailed study by Hornback and Whaley (2025) shows that inflows into spot ETFs have surpassed $75 billion, with their performance relative to Bitcoin futures and futures-based ETFs being extraordinary. However, the study also outlines stark differences between approved ETFs in terms of management fees, tracking performance, composition, and volatility.

As more derivatives become available, more institutional investors and traders are expected to enter the market. The long-term impact of this increased participation on the cryptocurrency market remains to be seen, but it is clear that derivatives offer a way of gaining exposure to cryptocurrencies while providing hedging opportunities without the cost and hassle of direct custody.