A Closer Look at CME Group’s Bitcoin Futures Launch

At a Glance

  • CME Group’s head of equity index on the advantages of bitcoin coming to a regulated marketplace

With the dollar value of bitcoin having grown around 1,600 percent, and bitcoin enthusiasm reaching new heights daily, 2017 will likely be remembered as the year of bitcoin. The meteoric increase in popularity can be seen, heard and retweeted – with one Twitter estimate suggesting a 600 percent increase in mentions of Bitcoin this year.

At CME Group, we just completed the successful launch of Bitcoin futures – a product that provides investors and market participants with an ability to manage their risk or gain exposure to the bitcoin market.  Highlights from the first day of trading include:

– More than 1,000 contracts traded with a notional value of more than $100 million

– 100 market participants across all regions

– Trades in each maturity and calendar spread

– Narrow basis between bitcoin futures and the cash market

When we decided to launch Bitcoin futures it was not because of the number of people talking about bitcoin. It was because of who was talking about it, and their need for better ways to manage risk and access bitcoin in a regulated, transparent market.

From our point of view, this was the right time to launch for three reasons:

 1. A Trusted Venue

A futures contract on a regulated marketplace provides a number of benefits to the bitcoin ecosystem including increased transparency, efficient price discovery and the ability to transfer risk – all of which will better enable market participants to manage their risk as the bitcoin market continues to evolve.

A functioning derivatives market can help both active traders and long-term investors access the opportunities in bitcoin without having to trade on spot venues that may require unfamiliar infrastructure such as digital wallets and cryptographic keys.  A Bitcoin futures contract at CME also allows traders to hedge their cash spot positions, which to date has been difficult to do.

2. An Established Reference Rate

CME Group is not new to bitcoin. We established the Bitcoin Reference Rate (BRR) in November 2016, and launching futures was the logical next step. The BRR allows us to deploy an index approach to the contract, meaning there is no single underlying spot price that determines final settlement.

Every day between 3 and 4 pm in London, the BRR is calculated by averaging 12 equally-weighted, five-minute windows; where in each window a volume-weighted median is determined from spot bitcoin transactions on four different constituent exchanges: itBit, GDAX, Bitstamp and Kraken. The BRR methodology, therefore, makes for a robust reference rate – one established more than a year before we launched Bitcoin futures.

3. A Diverse Group of Traders

The launch of this contract, more than anything, is a function of demand. We’ve been hearing it from customers for some time and this fall that demand finally reached critical mass. Commodity Trading Advisors (CTAs), ETF providers, hedge funds, sell-side firms, proprietary trading firms and retail traders, among others all voiced strong interest in a bitcoin futures contract. That diversified interest is  important. For any new contract we’re launching, we want balanced participation; if you don’t have balance, you will end up with a lopsided market that is one-dimensional in personality.

A Stronger Marketplace

When I spoke about Bitcoin futures at the Consensus Invest conference in November, a lot of the focus was on the discussion around margin, position limits and other risk controls we are implementing – as we do with all products — to manage customer exposure.

That is a critical element as to why customers want CME to list the contract, but it’s only one part of the reason this product makes sense now. It is all of these things – risk controls, a balanced population of traders from all segments, an established reference rate, and a trusted exchange partner in CME that together make for a stronger marketplace.

Tim McCourt is the Managing Director of Equity Products at CME Group

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