The price of an actual Bitcoin in the open crypto market, known as the BTC spot, fluctuates based on a countless number of factors, such as trading volume, usage, and adoption. However, other catalysts affect the active in a roundabout way. The Chicago Mercantile Exchange’s cash-settled Bitcoin futures trading products are a highly-referenced indirect element that helps drive Bitcoin (BTC) prices.
“The Bitcoin derivatives offered by CME are simply a way for accredited investors to place sophisticated trades and offsetting risks that would otherwise be inaccessible to them,” said Shawn Dexter, decentralized financial analyst at Quantum Economics – an analyst firm. markets – at Cointelegraph on October 8. “It has both a short and a long term impact on prices.”
CME Bitcoin futures trading at its simplest
At the height of Bitcoin’s biggest bull run to date, the CME on December 17, 2017 started trading Bitcoin cash-settled futures. Cash-settled futures, however, do not involve cash BTC. They simply let traders bet on the future price of Bitcoin without using the underlying asset.
For example, let’s say the Bitcoin spot price is at $ 10,000 per BTC at the start of a month and ends that month at $ 11,000. Buying a CME Bitcoin futures contract (equivalent to the price of five Bitcoin) when the price of BTC is $ 10,000 and holding until expiration at the end of the month means that the trader will receive $ 55,000 in cash at the end of the month, not the actual Bitcoin.
Since the transactions do not involve actual sales or purchases of Bitcoin, these futures products may logically not appear to have an impact on the spot price of Bitcoin. In reality, however, these futures are weighing on the price of Bitcoin, according to Dexter:
“In the short term, any price impact caused by a large buy in the futures market will quickly be arbitrated in the spot market, causing prices to converge. But it could just as easily happen if the big buy were to take place in the spot market first. ”
Sometimes Bitcoin trades at varying prices on different exchanges depending on events, order book demand, and other factors. If there is a large enough price spread, a trader can buy BTC for a lower price on one exchange and sell it for a higher price on a different exchange. This activity is called arbitration.
The price of Bitcoin on CME futures would likely increase significantly if someone bought a large number of Bitcoin futures on CME. This does not directly change the spot price of Bitcoin, although traders keen to buy or sell spot Bitcoin at a cheaper price as an arbitrage opportunity do drive up the spot price in tandem, according to Dexter. This concept works for a number of scenarios between CME and spot BTC.
Longer term, CME Bitcoin futures trading products more significantly affect the spot price of Bitcoin, Dexter explained, adding, “CME products allow for increased price stability and decreased risk. This is optimistic for Bitcoin as it allows larger investors to enter the market with less hesitation. Thus increasing liquidity and stability. Essentially, CME’s BTC futures add money to the market from large traditional traders and other participants while still allowing them to hedge their trades.
An explanation of a regulator
According to Heath Tarbert, chairman of the US Commodity Futures Trading Commission, derivatives markets can affect their respective underlying spot markets. Derivatives include futures trading products. “Sometimes cattle are actually priced in derivatives markets,” Tarbert told interviewer Anthony Pompliano on Oct. 7 as part of a segment at the LA Blockchain Summit. Cattle and Bitcoin are both considered commodities. Tarbert added: “People say, ‘Well the cattle futures contract says it should be x amount per head, and therefore that is what the real market price should be. ”
However, some commodity futures contracts are physically settled, involving the transfer of the underlying asset after expiration, thus differentiating from CME’s Bitcoin futures trading products. Including similar results, investment firm Wilshire Phoenix released a lengthy report on the subject of CME BTC futures on October 14, 2020, citing the conclusion: “CME Bitcoin Futures Further Help Price Discovery than its related cash markets. “
What about CME gaps?
The crypto space gives significant weight to CME gaps. A spread occurs on the CME Bitcoin futures chart when the spot price of Bitcoin moves while the CME Bitcoin futures markets are closed for the weekend or the holiday. If CME’s Bitcoin futures open for trading after a large move by Bitcoin, a gap is left on the chart between the price shown at the close of the CME and the price of BTC at the open.
The crypto space often expects the price of Bitcoin to return to such levels, “filling” the gaps in the chart. “Price doesn’t need to trade back and forth across a gap to be considered closed,” Dexter explained. “A gap is considered closed as long as it matches the price previously negotiated before the gap.”
Trading is largely a matter of probability. According to Dexter, probability favors filling in the gaps, although he added, “It is important to note that the gaps do not necessarily have to be filled,” since gaps exist in the same category as other chart designs:
“The price previously traded on CME before any deviation could be interpreted as the fair market price of Bitcoin. Also, depending on the type of spread, market participants are likely to open and / or close positions at the previously traded price, thereby causing the gap to be closed. “
Contrary to market sentiment in favor of closing the gap, Melvis Langyintuo, a client solutions strategist at OKCoin, told Cointelegraph on October 6 that the CME Bitcoin gap is unlikely due to lack of trading volume. CME’s Bitcoin futures contracts versus crypto-native derivatives exchanges.
Over the past 30 days, CME Bitcoin futures have brought in around $ 433 million in average daily volume, according to Langyintuo. In contrast, the popular crypto derivatives exchange BitMEX often hosts over $ 1 billion in 24-hour trading volume. In the past 24 hours, BitMEX’s perpetual Bitcoin exchange futures product has hosted nearly $ 1.4 billion in volume, based on figures released on the exchange. Several other high volume crypto-native derivatives exchanges exist as well, and these exchanges trade throughout the weekend, unlike CME Bitcoin futures, which adds to the equation.
“This makes the CME gap non-consecutive to BTC which could potentially close the gap,” Langyintuo said. “CME BTC prices are either lagging behind BTC price movements or they are a bet on where the CME BTC market could reopen on Monday,” he added. “Trading CME futures over the weekend is basically putting a weekend ‘put’ or ‘call’ on the spread to capture that spread,” he explained, referring to a similarity to Bitcoin options trading – another type of derivative seen on the CME and in the crypto space. Langyintuo concluded:
“For the price to close the gap, there would have to be a lot of volume on both the bid and the bid side of the futures contract before the weekend, and on Sunday, once the market resumes. , the same volume levels should be maintained in order to normalize the gap in a fluid manner. “
There are a large number of forces impacting Bitcoin. A conclusion can be difficult when it comes to the impact of a specific driver, although in this case it appears that CME’s Bitcoin futures contracts may affect the Bitcoin spot price on several levels.