The Cryptocurrency market has been experiencing unprecedented growth in recent years. With the rising demand for bitcoin, traders and investors are constantly seeking new and efficient ways to gain exposure to this volatile asset. CME Group has introduced Bitcoin Friday futures (BFF) to meet these needs. In this lesson, we will explore how BFF works.
What are Bitcoin Friday futures (BFF)?
Bitcoin Friday futures (BFF) from CME Group gives traders a new way to gain bitcoin exposure and manage risk. Unlike traditional Bitcoin futures, BFF stands out with its shorter-dated nature, expiring every Friday to align with the fast-paced nature of the Cryptocurrency market.
BFF is cash-settled along with having a smaller contract size compared to other Bitcoin futures. These features combine to enhance capital efficiency, allowing traders to optimize their risk exposure. With BFF, traders gain the advantage of participating in the Bitcoin market without needing substantial margin.
One of the key characteristics of BFF is its fractional bitcoin exposure. Each BFF contract represents a 1/50 (0.02) portion of a bitcoin, providing traders with the opportunity to gain exposure to cryptocurrency without the need to purchase a whole bitcoin. This fractional exposure allows for greater flexibility and enables traders to tailor their positions to their specific risk appetite and investment goals.
BFF contracts are listed on the two Fridays closest to the contract month. This design ensures that traders have ample opportunities to enter and exit positions. With its shorter duration, cash-settled structure, smaller contract size and fractional bitcoin exposure, BFF caters to the evolving needs of cryptocurrency traders and investors.
How Bitcoin Friday futures work
BFF operates on a unique schedule and follows specific naming conventions. Each BFF contract is named according to its expiration week and year. For instance, at the beginning of October 2024, the following two contracts will be listed: BFFV404 and BFFV411.
The settlement process for BFFs is based on the CME CF Bitcoin Reference Rate New York (BRRNY), a widely recognized and trusted benchmark. The BRRNY is determined through a process involving several cryptocurrency exchanges and market participants. This reference rate serves as the official settlement value for BFF contracts, ensuring transparency.
When a BFF contract expires, it is cash-settled based on the BRRNY published on the respective Friday at 4:00 p.m. New York time. The cash settlement amount is calculated by multiplying the BRRNY by the contract multiplier. This mechanism eliminates the need for physical delivery of bitcoins, simplifying the settlement process.
Benefits of trading BFF
One key benefit of BFF is their ability to serve as a risk management tool in the volatile Cryptocurrency market. By providing an additional hedging instrument, BFF enables traders to mitigate potential losses and protect their portfolios from adverse price fluctuations.
Another advantage of BFF lies in their flexibility and efficiency. Unlike traditional Bitcoin futures contracts, BFF expires every Friday. This feature allows traders to respond promptly to market developments and adjust their positions accordingly. Additionally, the fractional bitcoin exposure of BFF, set at 1/50 of a bitcoin, offers greater flexibility and precision in managing risk.
By utilizing the BRRNY as the reference rate, BFF provides traders with an additional layer of confidence and credibility in their activities. BFF offers a compelling suite of benefits for traders seeking exposure to the Bitcoin market or managing risk within their investment portfolios.
