A look at the Bitcoin futures markets

Jacob Pouncey

Cryptocurrency analyst, Saxo Bank

December 2017 saw the introduction of the much-anticipated futures product tracking Bitcoin. The CME Group and the Chicago Board Options Exchange launched futures trading on December 10 and 17. Futures allow buyers and sellers to lock in the future price of an underlying commodity or asset to be delivered or sold at some future date.

The CME Bitcoin Futures track the underlying “CME CF Bitcoin Reference Rate (BRR)”. The BRR aggregates the trade flow of major Bitcoin spot exchanges during a calculation window into a once-a-day reference rate of the USD price of Bitcoin . They do not require the physical delivery of Bitcoin but instead are settled based on the cash difference between the initial price and the settlement price.

The Federal Reserve Bank of San Francisco released a report in May 2018 stating that anticipation for these Bitcoin futures and their subsequent launch was a possible reason behind the price increase and the resulting decline – Bitcoin’s price peaked on the same day the CME launched its futures product. The report also stated that the market movements were in line with the behavior of other markets prior to the launch of similar derivative products.

Volumes were initially low following the futures' launch. As the chart below shows, howver, volume as well as open interest have increased in total. Still, though the total volume traded has increased, Cboe’s average traded volume and open interest have decline since January. The open interest for each contract started at similar levels, but now the CME is clearly the winner in terms of volume and open interest.

In the weekly “Commitments of Traders” report from the US CFTC, total open interest in any given futures market is broken down between various users. In its most primitive form, it simply differentiates between commercial and non-commercial users. As Bitcoin is not a commodity, such a breakdown makes little sense, but due to legal requirements both exchanges have nonetheless broken down open interest in this fashion. The result, however, provides little discovery considering the limited changes in long and short positions.

We expect the futures volumes to increase on the backs of increasing institutional demand. For example, Flow Traders (Europe’s largest ETF trader) will begin trading the Nasdaq Stockholm Bitcoin and Ethereum ETNs and will use the future products to hedge their risk.

Additionally, we expect the volume of the futures contracts to rise if the SEC approves a Bitcoin ETF as firms begin to hedge exposure risk to said fund.

The market is speculating that an Ethereum futures product is in the pipeline as the CME Group has introduced an Ethereum reference rate (the Bitcoin reference rate was a precursor to the creation of the Bitcoin futures product of the CME). Overall the introduction of the futures product represents the further institutionalisation of this emerging asset class.

Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Pty Ltd.
Level 25, 2 Park Street
NSW 2000
Sydney
Australia

Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Pty Ltd ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Combined Financial Services Guide & Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.