Options Giant CME Launches Bitcoin Futures — Here's What to Expect

Last week the Chicago Board Options Exchange (Cboe) introduced its bitcoin-based futures markets and the first day got a reasonable level of fanfare. Now the largest options exchange in the world, the Chicago Mercantile Exchange (CME Group) has launched its bitcoin derivatives products. Here’s what you can expect from CME Group’s bitcoin futures opening day.

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One of the Oldest and Largest Prediction Markets the Chicago Mercantile Exchange Enters the Bitcoin Arena

Last week Cboe’s XBT futures launch caused quite the stir and volume was pretty decent on the first day of trading. There’s been interest in the January expiry contracts as there are a little over 1,500 sold. However, the following months have waned as there are only 70 for February and 150 for March. Of course, it’s early, but major derivatives players see a lack of liquidity. That could all change as CME Group has just launched its bitcoin futures products. It’s safe to say CME is a far bigger whale in the sea of options markets and has a much broader customer base. CME’s launch should provide more liquidity while also making longs and shorts easier for institutional traders.

Legalized Betting Using Leverage

Futures markets are no different than legalized gambling where traders are allowed to place bets on the future outcome of a commodity, stock, currency, and bitcoin as well. Futures are popular because they enable leverage options (using leverage means you are getting a loan based on a deposit) and typically most futures contracts only require 10 percent. However, CME Group’s futures will require investors to meet a margin requirement of 43 percent. A contract unit is five bitcoins defined by the price of the CME CF Bitcoin Reference Rate (BRR).

So the reason retail investors dig investing in futures is because at an example price of $19K per BTC, a person would have to invest $95,000 to catch profits from price rises or drops for five bitcoins. Essentially through the magic of borrowing power (leverage), traders only have to pay $40,850 in order to make some gains. This means making profits off the price rises and dips tethered to five bitcoins at a much cheaper rate. Unlike Cboe’s futures which is solely based on the Gemini index, CME Group’s price reference rate is gathered from four. The BRR rate comes from the bitcoin exchanges Kraken, GDAX, Bitstamp, and Itbit which will coincide with the firm’s Bitcoin Real-Time Index (BRTI).

Limited Brokerage Service Options Will Mean Limited Liquidity

Just like Cboe’s bitcoin futures contracts, for CME Group’s derivatives, investors will need to utilize a brokerage service. Currently, there are not that many services offering futures for both companies which is likely causing the liquidity issues. On Monday the largest online brokerage service TD Ameritrade will offer Cboe’s contracts but will not provide CME’s products at the moment. Interactive Brokers who were one of the first to provide Cboe’s products will also allow CME’s futures. CME’s futures will be able to be purchased in contracts for the nearest two months in the March quarterly cycle (Mar, Jun, Sep, Dec) alongside the nearest two serial months.

Many bitcoin proponents have been excited about the CME addition, and some speculators believe the spot market price reflects the optimism. Last week just before Cboe launched its futures product, the spot price of bitcoin was low and started climbing precisely on the hour the derivatives were launched. Three days prior to the Cboe launch, bitcoin’s price tumbled to $13,400 across global exchanges but jumped back to $15,400 after the futures launch. The CME launch had the exact opposite happen to the spot price of bitcoin.

What do you think about CME Group’s bitcoin futures launch? Let us know what you think in the comments below.

Images via Shutterstock, CME Group, and Northwestern Medill

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