Liquidity and Market Efficiency: The Case of Bitcoin Derivatives

Open Access
Haw, Samantha
Area of Honors:
Bachelor of Science
Document Type:
Thesis Supervisors:
  • Louis Gattis, Jr., Thesis Supervisor
  • James R. Tybout, Honors Advisor
  • Bitcoin
  • Derivatives
  • options
  • futures
  • liquidity
  • market efficiency
This thesis seeks to discover how Bitcoin’s lack of liquidity causes its financial derivatives to behave differently than one would expect. This paper will specifically examine the regulated options and futures markets for Bitcoin. Options offered at LedgerX provide insight into Bitcoin’s liquidity by examining its term structure of volatility and volatility smiles. The difference between the implied volatilities for calls and puts suggest there is not enough trading for these options to have competitive pricing. This is further confirmed by studying volatility smiles that indicate there are call options trading at 0% implied volatility, when an investor should expect to pay for 80-100% volatility. This thesis then considers the futures market for Bitcoin. The futures curves appear to accurately represent investor sentiment toward Bitcoin at the time. However, the prices of the futures contract do not favor a positive or negative convenience yield. This indicates the futures contracts are not competitively priced either. This is further solidified by the numerous arbitrage opportunities available upon expiration. The thesis finds that the lack of liquidity is inhibiting Bitcoin from transitioning into a more mature market. This is an important topic of research for anyone considering investing in Bitcoin or its derivatives.