Two Years Later, Bitcoin Futures Are More Important Than Ever

At a Glance

  • The equivalent of 31,850 bitcoin have traded on average each day at CME Group in 2019
  • As bitcoin volatility continues, more market participants are looking to futures

On May 13, 2019, the price of bitcoin saw a sudden surge. After going below the $3,500 mark in late 2018, bitcoin prices had moved steadily upward to start the year. But this rise was especially big, nearly 20% over the previous 24 hours.

It was reminiscent of late 2017 when the bitcoin price looked like it would move higher in perpetuity, finally hitting a peak of around $20,000 in December of that year.

The May spike, however, was different. This time, traders in bitcoin could hedge their exposure to the cryptocurrency through futures contracts. In fact, a record 33,677 bitcoin futures traded at CME Group that day. At five bitcoin per contract, that’s the equivalent of 168,385 bitcoin.

It was a sign of just how much our CME Bitcoin futures markets had evolved since their December 2017 launch. As volatility comes and goes – bitcoin more than tripled in price to $12,000 in 2019 before retreating back to $7,000 – market participants can now manage bitcoin risk in a liquid futures market at CME.

Two Years of Futures

This week marks two years since CME Group launched Bitcoin futures. It’s an opportunity to take stock of how market participants are using the cryptocurrency.

Fewer than three million of the 21 million bitcoin remain to be mined, yet its status as a currency remains uncertain. Some observers believe the limitations of bitcoin make it more suitable as a store of value rather than a mainstream currency, while others suggest its volatility makes it more of a trading tool.

In a new study, Deutsche Bank analyst Jim Reid suggested demand for alternative currencies is likely to grow significantly over the next decade. The authors of a 2018 Morgan Stanley report similarly concluded that bitcoin has become an established institutional investment class. While these are strong votes of confidence for bitcoin, it’s not difficult to find others who take the opposite view.

However, the critical elements that futures bring are less about the direction of the market, and more about the transparency, price discovery and risk transfer of a regulated marketplace.

Growth in CME Bitcoin futures reflects genuine interest by sophisticated, global pools of capital to get exposure to cryptocurrencies, driven by growing interest in – and understanding of – the portfolio benefits. More than 3,600 individual accounts have traded bitcoin futures since their launch, with more than 1,600 new accounts added in 2019 and year-to-date average daily volume of 6,370 contracts (equivalent to 31,850 bitcoin).

Importantly, Bitcoin futures averaged 47 large open interest holders (LOIH) in Q3 2019, marking a quarterly record. A LOIH is any individual or entity that holds at least 25 contracts – an indicator that institutional interest is growing.

A New Forward Curve

Bitcoin futures markets are still evolving, and we know that the most efficient markets generally have tight spreads and strong liquidity. In this regard, futures have helped create efficiencies for a wide range of market participants to discover prices and manage their risk.

Importantly, open interest at all four futures expiries are creating a forward curve for this market, so investors can better discover and manage price.

In a further evolution of the market, CME Group will offer options on bitcoin futures beginning in January 2020 (pending regulatory approval), introducing a new tool to more precisely manage bitcoin-related price and event risks. Like Bitcoin futures, it will be pegged to the CME Bitcoin Reference Rate.

Managing Risk

Following the first day of CME Bitcoin futures trading two years ago, I wrote about why we launched the contract.

At the time, I couldn’t have predicted the rapid adoption and subsequent growth of our Bitcoin futures. I did state, however, one of the key reasons for launching our first cryptocurrency futures contract: diversified market participants voiced strong interest in it.

Two years later, participants, through their actions, continue to voice interest in the contract. And for whatever twists and turns bitcoin takes, futures are now an integral part of the risk management process.

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

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