“Bitcoin derivatives products are only a vehicle for accredited investors to hold sophisticated and risk-offset trades that would otherwise be inaccessible to them,” said Sean Dexter – a decentralized finance analyst at Quantum Economics. On 8 October. “This leads to both short-term and long-term effects on price.”
CME bitcoin futures trading is at its simplest
At the height of bitcoin’s biggest bull run ever, CME began trading cash-settled bitcoin futures on December 17, 2017. Cash-linked futures, although no real spot BTC is included. They simply let traders place bets on the future price of bitcoin without using the underlying assets.
For example, suppose the spot price of bitcoin is $ 10,000 per BTC at the beginning of a month and $ 11,000 at the end of that month. Buying a CME bitcoin futures contract (equivalent to the price of five bitcoins) when the BTC price is $ 10,000 and being caught through expiration at the end of the month means the trader will receive $ 55,000 cash at the end of the month, the actual bitcoin. No.
Since the trades do not involve any actual bitcoin sale or purchase, these futures products may not logically appear to affect the spot price of bitcoin. In reality, however, these futures weigh on the price of bitcoin, according to Dexter:
“In the short term, any price impact caused by heavy purchases in the futures market will be quickly arbitrary in the spot market, causing prices to change. But this can also happen when there was a huge purchase in the spot market earlier. ”
Many times, bitcoin trades on different exchanges based on events in different exchanges, demand for order books and other factors. If a large enough price discrepancy exists, a trader can buy BTC for a lower price on one exchange and sell it at a higher price on a different exchange. This activity is called mediation.
If a large number of bitcoin futures contracts were purchased on CME, the price of bitcoin on CME futures would increase significantly. This does not directly increase the spot price of bitcoin, although eager traders, according to Dextret, buy or sell bitcoin at a cheaper price on the spot, as an arbitrage opportunity. This concept works for many scenarios between CME and Spot BTC.
On a larger time horizon, the products of CME’s bitcoin futures trading significantly affect the spot price of bitcoin, Dexter explained, “CME products allow for the stability and low risk of price increases. For bitcoin it Fast because it allows big investors to join the market with less hesitation. Thus liquidity and stability is increasing. “Essentially, CME’s BTC futures add money to the market from big mainstream traders and other participants. , While also allowing them to hedge their trades.
Clarification from a regulator
According to Heath Tarbert, president of the United States Commodity Futures Trading Commission, derivatives trading markets for commodities can affect their respective underlying spot markets. Derivatives include products of futures trading. “Sometimes, the price of cattle is actually determined in the derivatives markets,” said interviewer Anthony Pompliano on October 7 as part of a segment during the La Blockchain Summit. Both cattle and bitcoins are considered commodities. Tarbert said: “People say, ‘The futures contract on cattle says that it should be x amount per head, and therefore, this should be the price in the real market.”
Some commodity futures are dealt with materially, however, involving the transfer of the underlying asset after expiration, thus, differs from CME’s bitcoin futures trading products. Incorporating similar findings, investment firm Wilhere Phoenix released a lengthy report on the topic CME BTC futures on October 14, 2020, citing the conclusion: “CME bitcoin futures in price discovery compared to their respective spot markets Contributes more. “
What about the CME interval?
The crypto space gives significant weight to the CME interval. A difference on the CME bitcoin futures chart occurs when the spot price of bitcoin moves while CME bitcoin futures markets close for weekends or holidays. If the CME’s Bitcoin futures opens for trading after the big move to Bitcoin, a gap is left on the chart between the listed price when the CME closes and the BTC price at the opening.
The crypto space often expects the price of bitcoin to return to such levels, “filling” any gaps on the chart. “The price does not need to trade in both directions through the gaps to be filled,” Dexter explained. “As long as the price already traded before the interval is met, a gap is considered to be filled.”
Trading is largely about possibilities. According to Dexter, probability fills the gap, although he said, “It is important to note that it is not necessary to fill the gaps,” as the gaps exist in the same range as other chart patterns:
“The price previously traded on the CME before any difference can be considered as the fair market value of bitcoin. In addition, depending on the type of gap, market participants are likely to open and / or close positions at a previously traded price, so the gap has to be filled. “
Contrary to market perception, in favor of filling the gap, however, Melvis Langintuo, a customer solutions strategist at OlCoin, told Cointegraf on October 6 that the CME bitcoin gap was possible due to the lack of bitcoin futures trading compared to crypto-native Are not. Derivatives Exchange.
According to Langyintuo, in the past 30 days, CME’s bitcoin futures have gained about $ 433 million in average daily volume. In contrast, the popular crypto derivatives exchange Bitmax often hosts over $ 1 billion in 24-hour trading volume. In the last 24 hours, BitMEX’s bitcoin perpetual swap futures product has hosted a volume of approximately $ 1.4 billion based on the numbers posted on the exchange. Several other high-volume crypto-native derivatives exchanges also exist, and these exchanges trade all weekend while CME does not make bitcoin futures, which adds to the equation.
Langyintuo stated, “This makes the CME gap non-consequential compared to filling the BTC potential gaps”. “CME BTC prices are either outpacing the BTC price move or they may reopen the CME BTC market on Monday, where there is a condition,” he said. “Trading CME futures over the weekend is essentially akin to placing a weekend ‘put’ or ‘call’ at odds to capture that spread,” he explained, referencing an analogy for bitcoin option trading – on CME Another type of derivative seen and the crypto space. Langyintuo concluded:
“For the price to fill the gap, there will need to be a lot of volume on both the bids and offer side of the futures contract before the weekend, and once the market starts trading on Sunday, versions of the same level will be required. The difference in effortless fashion should be maintained to normalize. ”
A large number of forces affect bitcoin. A conclusion can be difficult when it comes to how much impact any specific driver has, although in this case, it seems that CME’s bitcoin futures can affect the spot value of bitcoin on several levels.