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The effect of CME Bitcoin futures on the price of Bitcoin



The price of an actual bitcoin in the open crypto market, known as spot BTC, varies based on a myriad of factors, such as trading volume, usage and acceptance. However, other catalysts affect the asset in a circular motion. The cash-settled bitcoin futures on the Chicago Mercantile Exchange are a controversial indirect element with a high reference contributing to the price direction of bitcoin (BTC).

“CME-derived bitcoin derivatives are simply a means for accredited investors to make complex and risk-compensating transactions that would otherwise be inaccessible to them,” Sean Dexter, a decentralized financial analyst at Quantum Economics, a market analysis firm, told Cointelegraph. on October 8. “This leads to both short-term and long-term price effects.”

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CME Bitcoin futures trading is the simplest

In the midst of the biggest bull bitcoin to date, CME launched trading in cash-settled bitcoin futures on December 17, 2017. However, cash-settled futures do not actually include a spot BTC. They simply allow traders to bet on the future price of bitcoin without using the underlying asset.

Assume, for example, that the spot price of Bitcoin is $ 10,000 for BTC at the beginning of the month and ends this month at $ 11,000. Buying a CME bitcoin futures contract (equivalent to the price of five bitcoins) when the price of BTC is 10 $ 000 and retention until the end of the month means that the trader will receive $ 55,000 in cash at the end of the month, not actual bitcoins.

Since transactions do not involve actual sales or purchases of bitcoins, these futures products may logically not appear to affect the spot price of bitcoin. In reality, however, these futures really weigh on the price of Bitcoin, according to Dexter:

“In the short term, any impact on the price caused by a serious purchase on the futures market will be quickly arbitrated on the spot market, which will lead to price convergence. But it can also happen if a serious purchase first happens on the spot market.

Sometimes bitcoin trades at different prices on different exchanges based on events, search for an order book and other factors. If there is a large enough price discrepancy, the trader can buy the BTC at a lower price on one exchange and sell it at a higher price on another exchange. This activity is called arbitration.

The price of bitcoin on CME futures is likely to increase significantly if someone buys a large number of CME bitcoin futures contracts. This does not directly change the spot price of Bitcoin, although impatient traders would go to buy or sell a spot Bitcoin at a lower price as an option for arbitrage, raising the spot price in tandem, according to Dexter. This concept works for a number of scenarios between CME and spot BTC.

Over a longer period of time, CME’s bitcoin futures have a more significant impact on Bitcoin’s spot price, Dexter explained, adding: “CME’s products allow for increased price stability and reduced risk. This is a bullish bitcoin, as it allows larger investors to enter the market with less hesitation. This increases liquidity and stability. “In essence, CME’s BTC futures add money to the market from large traders and other players, while allowing them to hedge their trades.

Explanation from the regulator

Commodity derivatives trading markets could affect their respective spot markets, according to Heath Tarbert, chairman of the US Commodity Futures Trading Commission. Derivatives include futures trading products. “Sometimes the price of livestock is actually determined in derivatives markets,” Tarber told interviewer Anthony Pompliano on October 7 as part of a segment during the Los Angeles summit. Cattle and bitcoins are considered commodities. Tarbert added: “People say, ‘Well, the cattle futures contract says it has to be x the size of a head and therefore the price has to be on the real market. “

Some commodity futures are physically settled, but involve the transfer of the underlying asset upon expiration, thus differing from CME’s bitcoin futures. Including similar findings, investment firm Wilshire Phoenix published an extensive report on CME BTC futures on October 14, 2020, citing the conclusion: “CME Bitcoin Futures contributes more to price opening than related spot markets.”

What about the gaps in CME?

The crypto space gives significant weight to the gaps in CME. A difference arises in the CME Bitcoin futures chart when the spot price of Bitcoin moves while the CME Bitcoin futures markets are closed for the weekend or holidays. If CME bitcoin futures open for trading after a large bitcoin move, there is a gap in the chart between the indicated price at CME closing and the BTC price when it opens.

The crypto space often expects the price of bitcoin to return to such levels, “filling” any gaps in the chart. “It is not necessary to trade the price in both directions through an empty space to be considered filled,” Dexter explained. “The gap is considered to be filled as long as it corresponds to the pre-traded price before the difference.”

Trading is largely about probabilities. Probability favors filling gaps, according to Dexter, although he added, “It’s important to note that gaps don’t have to be filled in,” because gaps exist in the same category as other chart patterns:

“CME’s previously traded price before any difference can be interpreted as a fair market price of Bitcoin. In addition, depending on the type of difference, market participants are likely to open and / or close positions at the pre-traded price, thus causing a gap to be filled.

Contrary to market sentiment conducive to filling gaps, however, Melvis Langintua, a customer solutions strategist at OKCoin, told Cointelegraph on October 6 that filling gaps in CME bitcoin is unlikely due to CME’s lack of futures trading volume. compared to crypto-native derivative exchanges.

Over the past 30 days, CME’s bitcoin futures have brought in approximately $ 433 million on average daily volume, according to Langyintuo. In contrast, the popular cryptocurrency exchange BitMEX often hosts over $ 1 billion in 24-hour trading. In the last 24 hours, BitMEX’s perpetual swap futures product has hosted nearly $ 1.4 billion in volume, based on published numbers. There are several other large exchanges for cryptocurrency derivatives that trade over the weekend, while CME Bitcoin futures do not, which adds to the equation.

“This makes the CME gap without consequence compared to BTC, which potentially fills the gap,” Langyintuo said. “CME BTC prices either track BTC price movements or rely on where the CME BTC market may reopen on Monday,” he added. “CME futures trading over the weekend is similar to putting a put or empty call over the weekend to catch that spread,” he said, referring to similarities with bitcoin options trading, another type of derivative observed. of CME and in the crypto space. Langyintuo concluded:

“In order to fill the price gap, there will have to be a large volume of both offers and the offer side of the futures contract before the weekend, and on Sunday, after the market resumes trading, there will have to be the same volume levels to maintained to normalize the difference smoothly. “

A large number of forces are influencing bitcoins. The conclusion can be difficult when it comes to how big an impact each particular driver has, although in this case it seems that CME Bitcoin futures can affect the spot price of Bitcoin on a number of levels.


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