CME Group is celebrating the four-year anniversary of its Bitcoin futures contract (BTC), a product that has helped to revolutionize cryptocurrency trading since 2017. Before the introduction of this contract, traders could only trade actual bitcoin. But that has quickly changed, as average daily volume in CME Bitcoin futures soared to over 24,000 contracts during the third quarter of this year.
Bitcoin’s Benefits
CME Bitcoin futures allow investors and traders to gain exposure to bitcoin without the need to actually possess the cryptocurrency. These contracts allow a trader to speculate on the upcoming price of the asset, and because these contracts also have different expirations, they offer participants added flexibility. CME Bitcoin futures are cash-settled based on the CME CF Bitcoin Reference Rate. The popularity of bitcoin and the entire cryptocurrency market among both institutional and retail investors has exploded, and the thirst for alternative methods to trade and invest in this asset class has helped drive the development of this product. Many brokers – including Interactive Brokers, eTrade and TD Ameritrade – do not allow direct investments in cryptocurrencies, and therefore, the availability of CME Bitcoin futures has opened the door for retail futures traders to enter the space.
CME Bitcoin futures offer the following features, which allow participants to act on an opinion of movement ahead of major economic reports, Fed decisions, and other market events:
· Ability to hedge price risk. Investors who are holding digital assets can mitigate the risk of a falling price by simultaneously taking a “short” future position.
· Speculate on market direction. BTC futures trading affords the opportunity for real speculation to occur.
· Stabilize price fluctuations. In addition to speculation, BTC futures offer stability as long-term views of the markets play a more significant role. Futures help bitcoin holders to smooth exposure.
Bitcoin: A Brief History
Since 2016, there have been numerous major events where the ability to participate in the futures markets could offer major benefits.
June 2016: After a gain of almost 50% during the first two weeks of the month, bitcoin quickly drops almost 20% as a poll shows that U.K. voters are leaning toward staying in the EU.
November 2016: Around the time of the U.S. presidential election, markets around the world tumble, while bitcoin prices spike 5% in a single day.
April 2017: Japan officially recognizes bitcoin as legal tender; by month’s end, bitcoin rallies 30%.
February 2018: China totally bans all bitcoin trading and shuts down all mining activity, leading to a massive 40% drop in value.
July 2019: President Donald Trump repeatedly tweets that bitcoin and other cryptocurrencies are “based on thin air,” which leads prices to plunge 30% in just a week. Just a few weeks later, tensions ramp up between the U.S. and China, and bitcoin rallies almost 10% after President Trump tweets his plans to enact additional tariffs on Chinese goods.
March 2020: Moving with other markets worldwide, bitcoin falls by over 50% as the fear of COVID-19 grips the world.
October 2020: PayPal launches a new service allowing its customers to buy, hold and sell cryptocurrency directly from their PayPal accounts. Bitcoin responds by rallying over 7% to a new high.
April 2021: Coinbase, the largest crypto platform in the U.S., announces it’s going public, and bitcoin prices respond by moving more than 6% to a new high of over $63,000.
Demand for Micros
Based on increasing client demand and robust growth in the bitcoin futures markets, especially from retail traders, CME launched Micro Bitcoin futures earlier this year to add more granularity to trading and risk management strategies. Unlike the traditional CME Bitcoin future, which is sized at five bitcoin per contract unit, the new Micro contract ($MBT) is equivalent to 1/50 the size of this contract. Identical to standard CME Bitcoin futures, the Micro futures have a cash settlement and do not involve the exchange of bitcoin; therefore, no digital wallet is necessary to trade them.
According to Interactive Brokers Executive Vice President of Marketing and Product Development Steve Sanders, Interactive Brokers is seeing approximately “double the trades and triple the contracts.” He also added that about 65% of traded contracts come from outside the U.S., showing truly global demand for the new micro product. Since its launch in May, CME Micro Bitcoin futures have reached an average daily volume of 21,000 contracts.
Futures in general can have many advantages versus trading in a cash market. While the cash market refers to the buying and selling of physical assets, the futures market deals with the buying and selling of future obligations to make or take delivery instead of the actual asset. Futures contracts open the markets to investors/traders since they may be able to participate in markets where they would not otherwise have access. Most futures contracts offer a considerable amount of leverage and can be extremely capital-efficient, though margin requirements do exist. Most futures markets offer high liquidity, especially in the case of currencies, indexes and commonly traded commodities. This affords ease of access to these markets.
The major difference from the launch of CME Bitcoin futures in 2017 to now is major acceptance from institutional firms and the presence of an established futures contract. This has directly impacted the retail trader as it has made it much easier to participate in the market. Regardless of the future of bitcoin and other cryptocurrencies, the ever-growing popularity continues to gain traction, and it is likely the cryptocurrency macro environment will continue to adapt as needed.
OpenMarkets is an online magazine and blog focused on global markets and economic trends. It combines feature articles, news briefs and videos with contributions from leaders in business, finance and economics in an interactive forum designed to foster conversation around the issues and ideas shaping our industry.
All examples are hypothetical interpretations of situations and are used for explanation purposes only. The views expressed in OpenMarkets articles reflect solely those of their respective authors and not necessarily those of CME Group or its affiliated institutions. OpenMarkets and the information herein should not be considered investment advice or the results of actual market experience. Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments and, because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade. BrokerTec Americas LLC (“BAL”) is a registered broker-dealer with the U.S. Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority, Inc. (www.FINRA.org), and is a member of the Securities Investor Protection Corporation (www.SIPC.org). BAL does not provide services to private or retail customers.. In the United Kingdom, BrokerTec Europe Limited is authorised and regulated by the Financial Conduct Authority. CME Amsterdam B.V. is regulated in the Netherlands by the Dutch Authority for the Financial Markets (AFM) (www.AFM.nl). CME Investment Firm B.V. is also incorporated in the Netherlands and regulated by the Dutch Authority for the Financial Markets (AFM), as well as the Central Bank of the Netherlands (DNB).
