The Chicago Mercantile Exchange (CME) Group has launched its Bitcoin Futures Options product for trading, a development that has excited many in the space. But what are Bitcoin futures and what does it mean for the industry?
What are Bitcoin Futures Options?
Financial futures are contracts to buy or sell an underlying asset at a predetermined price on a specific date in the future. The other party is then obliged to fulfil the terms of the contract when it expires – whether this means buying or selling the asset at that price.
Futures are often seen as a risk management tool. You are essentially making a bet on the price of the asset over a specified period. This allows companies to hedge against risks associated with the price of an asset that could impact a certain area of their business. For example, a shipping company will bet on the price of oil going up at a certain date. That way, if the price of oil does go up and their costs are impacted, they can claw some of the money back.
Futures are not just for physical assets. They can also be traded on financial assets. In the case of Bitcoin futures, you are signing a contract that speculates on the price of Bitcoin at a certain point in the future, whether it will go up or down. You do not actually own any Bitcoin, rather it remains in the custody of the futures trading platforms like CME and Bakkt. You do not directly buy and sell Bitcoin on cryptocurrency exchanges and store it in your own wallet.
Essentially, entities that participate in Bitcoin futures are making a bet on the price of Bitcoin over a specified period.
Bitcoin futures have been available on multiple cryptocurrency exchanges since at least 2014, but CME was one of the first platforms to offer investors regulated products when it first launched its cash-settled Bitcoin futures in December 2017. Its existing Bitcoin futures trading offering saw $1.7B in value traded on a single day last year.
A growing market
In CME’s case, the options provide the right, but not the obligation, to buy or sell a specified amount of coins within a set time period. Each contract, quoted in US dollars, represents five Bitcoin. CME relies on trade flow data from several of the large Bitcoin exchanges to accurately track bitcoin's price.
Tim McCourt, managing director at CME Group, explained that: “It allows people to precisely manage the price risk associated with Bitcoin. You can deploy overriding strategies by selling calls, you can buy downside protection. These are things you can’t necessarily do with a linear one delta future. Lots of people are looking to deploy similar benefits and use cases for Bitcoin that they’re doing for other asset classes.”
According to Bloomberg, CME facilitated the trade of 54 contracts in the 24 hours since its launch, worth roughly $2.3 million in BTC. McCourt told The Block, "In terms of their ability to quote the market, consume the data, all technical aspects, everything worked as designed."
The market for Bitcoin futures has grown tremendously over the last year. According to a tweet from Bitcoin analyst Skew Markets, over $20 billion was generated in the daily volume of Bitcoin futures.
CME’s product is a competitor to rival Intercontinental Exchange’s Bakkt, which opened to some fanfare last year. However, it appears to have rapidly overtaken Bakkt’s volume. Bakkt’s December-launched Options product, to date, has only traded $1.1 million worth of BTC through its contracts. This is less than half the volume seen by CME in one day, despite having more than a month of a head-start.
Bakkt’s volumes were slow to take off when they launched in September 2019, but have risen sharply over the past month. Bakkt CEO, Kelly Loeffler has also left the firm to serve as senator of Georgia, replaced by the firm’s Chief Product Officer, Mike Blandina. This could serve to bolster Bakkt, providing a positive voice in government.
The popularity of such products provides more options to institutional investors and traders, and further cements their role in mainstream markets. It is, however, still early days, and it will be intriguing to see how such products develop in coming years.