“The Bitcoin derivatives offered by CME are merely a means for accredited investors to conduct sophisticated, risk-limiting deals that they would otherwise not have access to,” Shawn Dexter, a decentralized financial analyst at Quantum Economics – a market research firm – told Cointelegraph am 8th October. “This has both short-term and long-term effects on price.”
CME Bitcoin futures trading in its simplest form
At the height of Bitcoin’s biggest bull run to date, the CME started trading Bitcoin futures with cash settlement on December 17, 2017. However, cash-settled futures are not an actual spot BTC. They simply let traders bet on the future price of Bitcoin without using the underlying asset.
For example, let’s say the spot price of Bitcoin is $ 10,000 per BTC at the beginning of a month and ends at $ 11,000 that month. Buying a CME bitcoin futures contract (equivalent to the price of five bitcoin) when the price of BTC is $ 10,000 and expires by the end of the month means the trader will receive $ 55,000 in cash at the end of the month, not the actual one Bitcoin.
Since trades do not involve actual sales or purchases of Bitcoin, these futures products logically do not seem to affect the spot price of Bitcoin. In reality, however, according to Dexter, these futures are weighing on the price of Bitcoin:
“In the short term, all price effects caused by a strong buy on the futures market are quickly eliminated on the spot market, which leads to a convergence of prices. But this could just as easily happen if the hefty buy were to take place on the spot market first. ”
Sometimes Bitcoin is traded at different prices on different exchanges, depending on events, order book demand, and other factors. If there is a sufficiently large price discrepancy, a trader can buy BTC on one exchange at a lower price and sell it on another exchange at a higher price. This activity is known as arbitrage.
The price of Bitcoin for CME futures would likely increase noticeably if someone were to buy a large number of Bitcoin futures contracts on CME. This does not directly move the spot price of bitcoin, although avid traders would then buy or sell spot bitcoin at a cheaper price as an arbitrage opportunity, which, according to Dexter, also increases the spot price. This concept works for a number of scenarios between CME and spot BTC.
Over a longer time horizon, the CME’s bitcoin futures trading products will have a greater impact on the spot price of bitcoin, Dexter said, adding, “The CME products allow for greater price stability and lower risk. This is bullish for Bitcoin as larger investors can enter the market with less hesitation. This increases liquidity and stability. “Essentially, CME’s BTC futures bring money into the market from major mainstream traders and other participants while also allowing them to hedge their trades.
A statement from a regulator
Derivatives trading markets for commodities can have an impact on the respective underlying spot markets, according to Heath Tarbert, chairman of the US Commodity Futures Trading Commission. Derivatives include futures trading products. “Sometimes the price of cattle is actually set in the derivatives markets,” Tarbert told interviewer Anthony Pompliano on October 7th as part of a segment during the LA Blockchain Summit. Cattle and Bitcoin are both considered goods. Tarbert added, “People say, ‘Well, the cattle futures contract says it should be x the amount per capita, and so the price in the real market should be like this.'”
However, some commodity futures are physically settled, with the underlying asset being transferred upon expiration, which is different from CME’s Bitcoin futures trading products. With similar results, the investment firm Wilshire Phoenix published a detailed report on CME BTC futures on October 14, 2020, in which it quoted the conclusion: “CME Bitcoin futures contribute more to pricing than the associated spot markets.”
What about the CME gaps?
The crypto space gives CME gaps significant weight. A gap in the CME Bitcoin futures chart occurs when the spot price of Bitcoin moves while the CME Bitcoin futures markets are closed for the weekend or the holidays. When CME’s Bitcoin futures open for trading after a large move in Bitcoin, a gap remains on the chart between the price quoted when the CME is closed and the price of BTC when it is opened.
The crypto room often expects the price of Bitcoin to return to such a level and “fill in” any gaps on the chart. “Price doesn’t have to trade either way through a gap to be deemed filled,” explained Dexter. “A gap is considered filled as long as it meets the previously traded price before the gap.”
Trading is mostly about probabilities. According to Dexter, probability favors filling in gaps, although he added, “It’s important to note that gaps don’t necessarily need to be filled,” since gaps exist in the same category as other chart patterns:
“The price previously traded on CME in front of a gap could be interpreted as the fair market price of Bitcoin. Depending on the type of gap, market participants are likely to open and / or close positions at the previously traded price, thereby filling the gap. “
In contrast to market sentiment favoring gap fillings, OKCoin customer solutions strategist Melvis Langyintuo told Cointelegraph on October 6th that gap fillings for CME bitcoin are unlikely due to the lack of trading volume for bitcoin futures compared to crypto-native Futures exchanges.
In the past 30 days, the CME’s Bitcoin futures have averaged around $ 433 million in daily volume, according to Langyintuo. In contrast, the popular crypto derivatives exchange BitMEX often offers a 24-hour trading volume of over $ 1 billion. In the past 24 hours, BitMEX’s Bitcoin Perpetual Swap Futures product has hosted nearly $ 1.4 billion in volume based on the numbers posted on the exchange. There are several other high-volume crypto-native derivatives exchanges as well, and these exchanges trade all weekend while the CME Bitcoin futures don’t, which adds to the equation.
“This makes the CME void inconsistent with the BTC, which may fill the void,” Langyintuo said. “CME-BTC prices either follow BTC price movements or are a bet on where the CME-BTC market could reopen on Monday,” he added. “Weekend trading in CME futures is akin to putting a weekend” put “or” call “on the gap to capture that spread, he explained, pointing to a similarity to trading Bitcoin options – one another type of derivative that can be seen on the CME and in CME is the crypto room. Langyintuo concluded:
“For the price to fill the gap, there would have to be a lot of volume on both the bid and supply sides of the futures contract before the weekend, and the same volume would need to be maintained on Sunday when the market resumes trading to normalize the gap smoothly. “
A large number of forces affect Bitcoin. A conclusion can be tricky when it comes to how much influence a particular driver has, although in this case it looks like the CME’s bitcoin futures could affect the spot price of bitcoin on several levels.