CME Group, a leading marketplace for derivatives which handles 3 billion contracts worth about $1 quadrillion annually, is set to roll out bitcoin futures by the fourth quarter.

A bitcoin future will allow investors to bet on the future price of bitcoin without having to actually hold the coin itself.

It could bring more Wall Street firms into bitcoin and other cryptocurrencies.

Just when you thought you finally got your head around bitcoin, along comes a new bitcoin-linked financial product: bitcoin futures.

CME, the Chicago-based exchange giant, said on Tuesday that it would launch a bitcoin futures product before the end of the year. Last year CME launched a bitcoin index CME CF Bitcoin Reference Rate. The bitcoin futures will be based off of this rate.

Cross-town rival exchange Cboe has long had a plan for bitcoin futures in the works, and is also preparing for a possible Q4 launch.

Bitcoin popped after the news and has continued to rise since. It's gained more than $300 since Tuesday and is trading near $6,600 per coin.

Since the beginning of the year, the price of bitcoin is up over 500%. That epic rise has gripped the attention of Wall Street and Main Street alike. The development of bitcoin futures is the latest chapter in a broader story about cryptocurrencies gaining traction among traditional players in financial services.

Here's a quick explainer of bitcoin futures and why they could be a big deal for Wall Street and bitcoin.

What are futures?

Futures, which allow two parties to exchange an asset at a specified price at an agreed upon date in the future, have been around since the late 19th century. They are traditionally traded by professional investors and firms.

CME trades futures based on everything from oil to corn. In some cases, when a futures contract settles the buyer of the contract can receive their payment in the product itself (a barrel of oil, say), or in cash.

The latter are referred to as cash settled futures.

For instance, an investor can buy a future for a commodity like oil betting that its price goes up at a certain point in time. Let's say oil is trading at $50 right now, and the investor thinks the price is going to go higher. They might buy a future to buy oil at $55 a month later. If the price of oil is $60 when the contract expires, they get the $5 difference.

What would a bitcoin future look like?

Both Cboe and CME have said that their bitcoin futures products would settle in cash. And that's exactly what makes the possible market so appealing to Wall Street. Firms who buy or sell bitcoin futures don't have to worry about actually holding the cryptocurrency itself.

In a way, bitcoin futures would be similar to other futures traded on Wall Street, according to Bank of America Merril Lynch.

"The reason this may be relatively straightforward is that there is no conceptual difference between running a futures market on bitcoin (or technically some cross rate involving bitcoin) and oil," the bank said in a wide-ranging note about cryptocurrencies.

John Deters, chief strategy officer of Cboe, highlighted this feature of the product in a recent interview with Business Insider.

"People will be able to settle in cash," Deters said. "So you can take a speculative position without touching bitcoin itself, which helps make it more attractive to all sorts of folks."

You can take a speculative position without touching bitcoin itself, which helps make it more attractive to all sorts of folks.

Why do people care?

There are a number of reasons why bitcoin futures products would be a big deal for Wall Street and the world of crypto. First, the launch of bitcoin futures by establishment firms is likely to to open the door to wider participation in bitcoin trading by other Wall Street firms.

"The CME announcement provides the first step in legitimizing the ever-growing crypto space as a true financial asset," Dave Johnson, the CEO of Latium, a cryptocurrency technology company, told Business Insider. "For market makers this presents access from a known and trusted party into a $94 billion marketplace."

Business Insider previously reported two high-frequency traders, Virtu Financial and DRW, are looking to provide liquidity in bitcoin futures markets. And other firms are likely to jump on the bandwagon as well. Goldman Sachs, for instance, is thinking about setting up a bitcoin trading operation.

Futures could also help dampen volatility in the underlying bitcoin market, which is known for its wild price swings. Here's Bank of America:

We would not overstate this, as a material reduction in volatility would require there to be a large community of speculators prepared to provide liquidity to the natural owners of the various coins, but given the volatility of the coin markets, maybe there already exists a cadre of participants who would look to short coins on strong days and vice versa, which could overall reduce volatility.