Lee said in his report that there is “significant volatility” in Bitcoin‘s price around the expiration date of CME Group and CBOE futures contracts.
CME Group and CBOE both launched Bitcoin futures products in December when Bitcoin was trading close to record highs around $20,000. Bitcoin has tumbled since then. Bitcoin is down 0.35% against the dollar to $6,438.56 as of 8.45 a.m. BST (3.45 a.m. ET) on June 18.
Bloomberg reports that Lee wrote that traders who are long Bitcoin and short futures could sell Bitcoin during the price auction to cause the price to drop and leave their futures contracts “with a handsome profit.”
Lee’s theory raises the prospect that Bitcoin could be vulnerable to manipulation due to futures contracts. The CME and CBOE futures contracts are settled based on a price derived from auctions across several exchanges. However, many of these exchanges have relatively low liquidity, meaning that people could potentially manipulate the price by selling or buying significant sums of Bitcoin during the auction.
Business Insider highlighted the risk in December. John Spallanzani, the chief macro strategist at GFI Group, said he was concerned that low volumes on Gemini, one of the exchanges used to calculated price, could make it vulnerable to manipulation.
“The lower the volumes, the easier to manipulate,” he said. “Since the volume is low and [bitcoin] is unregulated it is conceivable.”
The Commodity Futures Trading Commission, which has oversight of Bitcoin futures, is said to be involved in a US Justice Department probe into market manipulation of Bitcoin. The precise nature of the probe is not clear at this time.
Coinfloor, a UK-based Bitcoin exchange operator, announced plans for a physically settled Bitcoin futures contract in March. This is where holders of a contract are actually given the requisite Bitcoin when the contract expires. CBOE and CME Group both give the cash value of Bitcoin at the expiration of their contracts.
Obi Nwosu, the CEO of Coinfloor, told Business Insider last week that the physically settled futures were a response to demand from Coinfloor’s institutional clients who were concerned about the ease of manipulation of cash-settled contracts. Any price manipulation around auctions would be short-term and if investors take delivery of Bitcoin at the expiration of a contract they can simply wait for the price to stabilise before selling it.