Impact of CME Bitcoin Futures on Bitcoin Price
Although CME’s bitcoin futures trading products do not trade actual bitcoin, they indirectly affect open market prices.
The price of an actual bitcoin in the open cryptocurrency market known as spot bitcoin fluctuates due to a variety of factors such as trading volume, usage, and acceptance. However, other catalysts influence the property indirectly. Bitcoin futures trading products with cash settlement from the Chicago Mercantile Exchange (CME) contribute to the price direction of Bitcoin as an allegedly highly referential indirect factor.
“The Bitcoin derivative products offered by CME are simply a means for accredited investors to execute complex trades and offset risks that are otherwise inaccessible to them. This has both short-term and long-term effects on prices, ”said Shawn Dexter, a decentralized financial analyst with market research firm Quantum Economics.
Easiest CME Bitcoin futures trading
At the height of Bitcoin’s biggest bull run to date, CME launched Bitcoin futures trading with cash settlement on December 17, 2017. However, the futures contract will be settled. They simply let traders bet on the future price of Bitcoin without using the underlying asset.
For example, let’s say the spot price of Bitcoin started the month at $ 10,000 per BTC and ended this month at $ 11,000. Buying a CME Bitcoin futures contract (equivalent to the price of 5 Bitcoins) at a Bitcoin price of USD 10,000 and holding it until the end of the month means that the trader will receive USD 55,000 in cash at the end of the month, the actual Bitcoin.
Since the transactions are not actually buying or selling Bitcoin, it is logically unlikely that these futures products will affect Bitcoin’s spot price. In reality, however, according to Dexter, these futures contracts have an impact on Bitcoin price:
“In the short term, the effects of overbought prices on the futures market will quickly deviate from the spot market and pull prices down. However, this could also happen if first bulk purchases are made on the spot market. “
Sometimes Bitcoin will trade at different prices on different exchanges based on events, order demand, and other factors. If the price difference is large enough, traders can buy Bitcoin on one exchange at a lower price and sell it on another exchange at a higher price. This activity is called arbitrage.
The Bitcoin price on CME futures is likely to increase significantly if someone buys a large number of Bitcoin futures on CME. This does not directly shift the spot price of Bitcoin, although eager traders will then buy or sell Bitcoin on the cheaper spot market as an arbitrage opportunity, which, according to Dexter, causes the spot price to rise. This concept fits a number of cases between CME and Spot Bitcoin.
Over a longer period of time, CME Bitcoin futures trading products have a greater impact on the spot price of Bitcoin, explained Dexter: “CME products enable higher price stability and reduce risk. This is bullish for Bitcoin as it allows larger investors to enter the market with less hesitation. That increases liquidity and stability. ”Essentially, CME bitcoin futures add funds to the market from major mainstream traders and other participants while also allowing them to hedge their own trades.
Declaration by the regulator
According to Heath Tarbert, chairman of the US Commodity Futures Trading Commission (CFTC), the market for commodity derivatives may have an impact on the corresponding underlying spot market. Derivatives include futures trading products. “Sometimes livestock prices are actually set in derivatives markets,” Tarbert said speak with Anthony Pompliano on October 7th during the LA Blockchain Summit. Cattle and Bitcoin are both considered commodities. “People say, ‘The cattle futures contract says it should be x amount per capita, and so that should be the real market price,'” added Tarbert.
However, some physically settled commodity futures involve the transfer of the underlying asset upon expiration and are therefore different from CME’s Bitcoin futures trading products. Based on similar findings, investment firm Wilshire Phoenix has one report Long on the subject of CME Bitcoin Futures on October 14, 2020, citing the conclusion: “CME Bitcoin Futures contribute more to pricing than the associated spot markets.”
What about the CME gap?
The crypto space increases the role of the CME gap. Gaps appear in the CME bitcoin futures chart when the spot price of bitcoin changes while the CME bitcoin futures market is closed for a weekend or holiday. When the CME Bitcoin futures contract is opened for trading after a large move in Bitcoin, there will be a gap on the chart between the quoted price when the CME closes and the price of Bitcoin when it opens.
The crypto space usually expects Bitcoin price to return to such a level and “fill in” any gaps in the chart. “The price does not have to trade in both directions through what is considered to be a gap. The gap is considered filled as long as it reaches the previously traded price level before the gap was created, ”explains Dexter.
Trading is largely based on probability. The probability favors filling the void. According to Dexter, “it is important to note that gaps are not necessarily filled,” as gaps exist in the same category as other chart patterns:
“Previously traded prices on the CME in front of any gaps can be interpreted as the fair market price of Bitcoin. In addition, depending on the type of gap, market participants have the option of opening or closing positions at previously traded prices and thus filling the gap. “
Contrary to market sentiment, which favors closing gaps, Melvis Langyintuo, Client Solutions Strategist at OKCoin, says closing the Bitcoin CME gap is unlikely due to the lack of volume in the CME.
For the past 30 days, the CME Bitcoin futures have brought in an average daily volume of around $ 433 million. In contrast, the popular BitMEX futures exchange typically has a trading volume of more than $ 1 billion in 24 hours. In the past 24 hours, BitMEX’s Bitcoin Perpetual Swap Futures product has taken on nearly $ 1.4 billion in volume. There are several other high volume crypto derivatives exchanges as well, and these exchanges trade all weekend, while CME Bitcoin futures do not, which adds to the balance.
“This makes the CME gap less momentous than Bitcoin, which can fill the gap. The Bitcoin CME price follows the Bitcoin price movement, either they are betting on where the CME Bitcoin market could reopen on Monday. Trading CME futures over the weekend is essentially the same as placing a put or call order over the weekend to capture that spread, “explained Langyintuo, referring to the analogy to trading and in the crypto room. Langyintuo concluded:
“In order for price to fill the void, there needs to be a lot of volume on both the buy and sell side of the futures contract before the weekend, and it needs to maintain the same level of volume on Sunday when the market resumes trading to normalize the gap smoothly ”.
There are a variety of forces affecting Bitcoin. It can be difficult to draw conclusions about the influence of a particular driver, although in this case it is likely that CME Bitcoin futures could influence the spot price of CME.Bitcoin on several levels.
According to Cointelegraph