How Derivatives Markets Distort True Price Signal
Math -
In our brief existinance on earth Math has proven to be the bedrock on which we build all observations of the universe around us.
Modelling our experience with the world, Physics was built upon math - axiomatically.
To us humans - Physics and Math are effectively - reality.
Bitcoin was built on math. It is the closest thing to the truest pursuit of money that humanity as ventured upon.
Bitcoin tackles one of the previous painpoints of Money that Gold partially achieved - in that it is a “Store of Value”.
However Gold itself suffers from inflation. More and more gold is pulled out of the ground every year. Diluting the store of value effect slowly and surely.
This diagram above is the Stock to Flow Model of Bitcoin. It models on the black solid line - the relationship between existing supply and new production. The clue is in the name. How much do we currently have and how much new stuff is being made.
It is a relationship modelled on physical resource extraction from the ground.
A fellow named PlanB decided to statistically model the price of bitcoin relative to its Stock/Flow ratio years back and found a statistically signification relationship - off the top of my memory ~95% r squared.
Rephrasing that - one could statistically determine future price of Bitcoin based off the math that built bitcoin when factoring in inflation of Dollars.
I.e. a mathematically true - crystal ball.
Now looking at the Stock To Flow Chart from 2026 - you can see the price action as the colored line hugging the solid black line.
Until recently.
Something changed.
Math and Physics
So what changed?
Bitcoin itself didn’t change. It was built on Math. It delibrately produces less and less bitcoin every year - THE EXACT OPPOSITE OF INFLATION.
Said another way - as time goes on the price of Bitcoin as the numerator and the USD denominator - the price of Bitcoin is guarenteed to go up.
So if Bitcoin protocol hasn’t changed and given that Math hasn’t changed what is causing the price to decouple from this chart?
As you may have guessed - manipulation from powerful forces that control the world.
Derivatives Markets
You may have heard of derivatives markets - they are effectively other markets that take an input (such as Gold or Bitcoin or Coffee) and expand upon the surface area of things you can gamble on.
They introduce more points that you can place bets on.
Traditional Stock would allow you to make money by buying low and selling high.
Derivatives built upon that Traditional Stock allow you to make money on a larger scale with mulitpliers as well as any number of combinations of price action, time, volatility and so on.
Fiat
Given that the frame of reference for unit of account is always Fiat and that Governments have a Conterfeiting license to make infinity of it. All of these markets are based in Fiat to which the rule makers can make more of and less of.
If one didn’t want Gold to challenge the US dollar - say if you were fearful of people loosing confidence in the Dollar - you would want to supress that alternative.
The same goes for Bitcoin.
If the cost of making Fiat is zero, and you can make as much of it as you wanted. You could use infinity resources to manipulate markets to supress the price action of competitors such as Gold and Bitcoin.
Rules for Thee Not For Me
Plebs wanting involvment with Bitcoin were shut out for the longest time.
Banks and Credit Cards blocked buying of Bitcoin as it was “Shady and risky”.
Spot ETFs holding Bitcoin (Spot meaning they just trade the raw commodity such as they buy Bitcoins or Gold) were blocked for the longest of time due to the “risk”.
Warren Buffet called Derivatives markets “financial weapons of mass destruction” however strangely enough Derivative products of Bitcoin were approved before you could actually buy just Bitcoin in an ETF.
By years.
The futures market was approved in 2021, then years later in 2024 the first straight up Bitcoin ETF was approved.
Why in this order?
Derivatives markets are considered advanced, risky tooling to the amateur. You can make and lose money at 10x the pace.
Why would they hand them the sharp tool to cut themselves with instead of the dumb, blunt tool of raw Bitcoin ETF?
Derivatives For Manipulation
Below is the crux of how competition to Fiat - be it Silver, Gold, Bitcoin is kept at bay
Derivative movements dictate the underlying spot price because mathematical arbitrage rules force institutional market makers and high-frequency trading desks to aggressively buy or sell the physical asset in order to hedge their own risk and keep their books neutral.
Futures Market
Remember this was the first product allowed for Bitcoin?
How are Futures Markets used to manipulate publics perception of an asset?
With unlimited liquidity (ability to print fiat), relentlessly dumps massive, blunt sell blocks into the cash-settled futures market to artificially drive the paper price down. Because of cash-settled the underlying asset never needs to get transferred in order to negatively affect the spot price of the asset.
Because the futures and physical markets are tightly linked by high-frequency trading algorithms, these automated arbitrage bots instantly step into the spot market and copy the selling pressure, dumping the actual underlying asset to capture the price discrepancy and dragging the spot price off a cliff.
ALSO
They can work on both the sell side and the buy side.
They can make cash-settled supply by making infinite “paper” assets to flood supply.
So they directly hammer both sides of price discovery by pulling both on the supply side as well as the demand side.
Options Market
Instead of selling the asset directly, the actor floods the market with aggressive, short-dated, out-of-the-money put options to lock institutional dealers into a Negative Gamma trap.
To rebalance their risk and remain delta-neutral, the market makers who sold those puts are mathematically forced to immediately short-sell the underlying asset onto the open market; as the price falls closer to the put strikes, their risk algorithms go out of whack again, forcing them to short-sell even more asset in a cascading, automated doom loop.
Conclusion
Bitcoin is like wearing swimming goggles when underwater - you can see clearly. All other past peers were like opening your eyes underwater with no goggles.
The fact that Bitcoin was created from scratch around Mathematics, we have a clear handrail as to what the price should be and what it is.
Effectively shining a spotlight on the only other variables in the picture - the manipulation via the Derivatives markets afforded by Fiat currency.
HOWEVER
1 Bitcoin is 1 Bitcoin.
1 Bitcoin today is 1 Bitcoin in 10 years.
The manipulation and distortion is only present in the Universe where you weigh the value of Bitcoin relative to a Fiat currency.
In an alternative mindset where trade and transaction is purely done in Bitcoin - it has ZERO effect.
It comes down to the context that you see the world in.