Optimistic investors bid up Bitcoin ahead of introduction of futures, but new derivatives enabled pessimists to bet against Bitcoin, bringing the price down
Galina Hale, Arvind Krishnamurthy, Marianna Kudlyak, and Patrick Shultz From Bitcoin's inception in 2009 through mid-2017, its price remained under $4,000.
Context & Ripple Effects
This San Francisco Fed piece by Galina Hale, Arvind Krishnamurthy, Marianna Kudlyak, and Patrick Shultz is the canonical post-mortem of the 2017 cycle: optimism bid Bitcoin up ahead of futures' introduction, then the very derivatives that legitimized the market handed pessimists their first cheap way to short it, and the price came down. It reframes the crash not as a sentiment collapse but as a market-structure event — the arrival of a two-sided market.
First-order effects
- Short sellers gained, for the first time, a regulated instrument to express a bearish view on Bitcoin, converting what had been a one-way long-only trade into a contested market.
- Holders who bought into the pre-futures run-up absorbed the downside as the same derivatives infrastructure that attracted them enabled the reversal.
Second-order effects
- A tradable short side made Bitcoin legible to institutions that could never touch spot-only venues, laying groundwork for the later cycles in which it set its 2020 record near $19,783 with longer-term buyers rather than the 2017 cohort of first-time Asian retail investors.
- With pessimists able to price risk, Bitcoin's behavior converged with conventional assets — by 2022 its fluctuations increasingly mirrored the broader tech stock market, undercutting the inflation-hedge pitch.
Third-order effects
- Derivatives depth has made Bitcoin's drawdowns faster and more synchronized with macro risk appetite — the pattern behind the November 2025 slide below $100K and the February 2026 fall below $73,000 — even as calm stretches like the recent two-year-low implied volatility show a maturing, two-sided market.
- If the structure holds, Bitcoin's price discovery stays anchored in regulated derivatives markets, with legitimacy and leverage growing together — the recurring tension between institutional acceptance and amplified cyclicality.
The trend: Bitcoin is evolving from an asymmetric, long-only speculative asset into a fully two-sided institutional market whose crashes are driven as much by market structure as by sentiment.