The meteoric rise of Bitcoin, as well as the cryptocurrency asset class as a whole, has brought the concept of digital money into the mainstream. The relative ease of entry and the possibility of realising large gains has led individuals around the world to engage the cryptocurrency markets on a daily basis. If you have a computer, internet connection and risk capital, trading these products via an exchange or CFD provider can be a routine endeavour.

As of December 2017, the launch of standardised Bitcoin futures made participation even easier for traders and investors. Restrictions facing Bitcoin CFDs and tax concerns surrounding trades executed on cryptocurrency exchanges served as formidable barriers-to-entry for many. Products now listed on prominent futures exchanges give U.S. traders in particular the opportunity to engage Bitcoin using the many advantages specific to derivative products.

Bitcoin Futures Products

In consideration of the public interest surrounding cryptocurrencies and the growth potential of blockchain technology, several globally reputable futures exchanges initiated plans to offer standardised Bitcoin futures contracts. Two prominent U.S.-based exchanges, the Chicago Futures Exchange (CFE) and Chicago Mercantile Exchange (CME), launched Bitcoin futures in December 2017.

The first of these products to hit the open market was the CFE’s XBT contract. Upon it becoming available, the spot price per Bitcoin spiked by £1500 for the 11 December 2017 session.1)Retrieved 6 June 2018 https://www.cnbc.com/2017/12/11/bitcoin-price-jumps-2000-after-cboe-futures-launch.html There were extreme levels of participation during the launch that led to intermittent CFE system outages and a 20% rally in Bitcoin pricing.

Below are the contract specifications for Bitcoin futures on the CFE:

  • Name: Cboe Bitcoin (USD) Futures
  • Listing Date: 10 December 2017
  • Contract Size (Quantity): 1 Bitcoin
  • Symbol: XBT
  • Denomination: U.S. dollars and cents
  • Tick Size: 5.00 points
  • Tick Value: US$10
  • Expiration: Monthly
  • Settlement: Financial
  • Platform: CFE System2)Retrieved 6 June 2018 http://cfe.cboe.com/cfe-products/xbt-cboe-bitcoin-futures

One week after the CFE launch, the CME Group proceeded with its own Bitcoin offering.

As the world’s largest futures exchange, it was widely publicised and anticipated. However, only moderate volatilities were observed in BTC, with the price falling 2% for the opening session.3)Retrieved 6 June 2018 https://www.cnbc.com/2017/12/17/worlds-largest-futures-exchange-set-to-launch-bitcoin-futures-sunday-night.html

The following are the contract specifications for CME Bitcoin futures:

  • Name: CME Bitcoin Futures
  • Listing Date: 17 December 2017
  • Contract Size (Quantity): 5 Bitcoin
  • Symbol: BTC
  • Denomination: U.S. dollars and cents
  • Tick Size: 5.00 points
  • Tick Value: US$25
  • Expiration: Monthly
  • Settlement: Financial
  • Platform: CME Globex4)Retrieved 6 June 2018 http://www.cmegroup.com/trading/equity-index/us-index/bitcoin_contract_specifications.html

Both products provide traders and investors with a means of engaging the Bitcoin derivatives markets. Nonetheless, there is a considerable difference between the two offerings: size. The CFE contract is based on an underlying asset of one Bitcoin, while the CME instrument is valued in terms of five Bitcoin. This led to the CME BTC’s US$25 per tick value in comparison to the CFE XBT’s US$10.

The discrepancy in contract size has a significant impact on the pool of participants that regularly interact within each market. The CME offering is much larger in terms of value, making it a more attractive alternative to institutional or high-net worth investors. For the initial six months of BTC trade, institutional participation is credited with boosting volumes in the neighborhood of 50%.5)Retrieved 6 June 2018 http://www.scmp.com/business/markets/article/2141119/demand-institutional-investors-drives-bitcoin-futures-trading

Due to its moderate tick size, smaller retail traders find the CFE Bitcoin contract more suitable. While retail demand for the XBT contract is far from constant, some online brokerage firms have attempted to capitalise upon its popularity. By providing clients with trading options in tandem with equities and ETF instruments, many brokers are positioning themselves to accommodate coming demand.6)Retrieved 6 June 2018 http://fortune.com/2017/12/20/etrade-cboe-bitcoin-futures-trading/

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Will Bitcoin Futures Be A Success?

The success of a new futures contract is far from a certainty. Many fall by the wayside when a lack of public interest negatively impacts traded volumes and levels of liquidity. The eventual result is a delisting of the contract itself.

According to academia, there are three inherent qualities that a futures contract must possess to achieve longevity as a financial instrument:

  • Demand For Hedging: Commercial producers or financial institutions must have a need for the product when executing their risk management strategies.
  • Attraction of Speculators: There must be incentive for traders interested in profiting from pricing fluctuations to participate in the market. A broad pool of speculative interest ensures adequate market liquidity and efficient price discovery.
  • Governmental Cooperation: The regulatory environment must be supportive of derivatives trading in order for a new contract to flourish.7)Retrieved 6 June 2018 https://www.edhec.edu/sites/www.edhec-portail.pprod.net/files/publications/pdf/edhec-working-paper-why-some-futures-contracts_1436277798888-pdfjpg

Traded volumes, open interest, institutional participation and speculative opportunities are the typical calling cards of a viable futures contract. These components can be hard to come by, even if the underlying asset class is popular. Failure of futures products based upon global cotton, certified debt obligations and even snowfall are modern examples of new listings falling flat.

Ultimately, the success of the XBT and BTC futures contracts will depend on public interest and trading activity. In order for speculative opportunities to exist, there must be adequate market liquidity and consistent volatility—two characteristics that attract higher levels of participation.

Bitcoin pricing is subject to extreme fluctuations, thus consistent volatility is accounted for. The big question facing its lifespan as a futures product is whether or not there will be enough day-to-day volume to make it a viable trading alternative.

It is a circular concept, but traded volumes attract more traders, which in turn boosts activity and brings more volume. Volumes have been limited for the first six months of trade, but they have also shown signs of growth.

In April 2018, XBT experienced a period of heavy participation measuring almost three times that of normal levels.8)Retrieved 7 June 2018 https://news.bitcoin.com/bitcoin-futures-markets-see-a-big-uptick-in-trade-volume/ During the same period, BTC action featured a dramatic upswing, trading two-and-a-half times the normal daily handle.9)Retrieved 7 June 2018 https://cryptoslate.com/bitcoin-futures-posting-new-highs-in-daily-volume/ While it remains to be seen if these levels are sustainable in the long-term, the expansion of public interest for the first six months is perceived to be a positive sign.

Summary

Although cryptocurrencies are in their infancy, many financial industry professionals view the asset class as being much more than a passing fad. Aside from Bitcoin, products such as Ethereum, Litecoin and Ripple have piqued the interest of not only retail traders but institutional investors.

Upon going public, initial coin offerings for new cryptocurrencies commonly raise investment capital in the tens of millions of pounds. Bitcoin itself has a market capitalisation of over US$117 billion,10)Retrieved 5 June 2018 https://www.statista.com/statistics/377382/bitcoin-market-capitalization/ more than 80% of the companies included in the S&P 500.11)Retrieved 6 June 2018 https://www.slickcharts.com/sp500

With growing popularity and acceptance, cryptocurrencies are projected by many to become the new standard for money in coming years. Financial institutions around the globe have begun integrating blockchain technology into operations. Household names such as Overstock.com, Dish Network, Microsoft and Expedia.com already accept payments via Bitcoin.12)Retrieved 7 June 2018 https://www.lifewire.com/big-sites-that-accept-bitcoin-payments-3485965

In the event that Bitcoin becomes a staple of global commerce, then retail and institutional demand for related futures products will likely do the same. If this is the case, then Bitcoin offerings are poised to remain part of the futures landscape for years to come.

Any opinions, news, research, analyses, prices, other information, or links to third-party sites contained on this website are provided as general market commentary and do not constitute investment advice. The market commentary has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is therefore not subject to any prohibition on dealing ahead of dissemination. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

References   [ + ]

1. Retrieved 6 June 2018 https://www.cnbc.com/2017/12/11/bitcoin-price-jumps-2000-after-cboe-futures-launch.html
2. Retrieved 6 June 2018 http://cfe.cboe.com/cfe-products/xbt-cboe-bitcoin-futures
3. Retrieved 6 June 2018 https://www.cnbc.com/2017/12/17/worlds-largest-futures-exchange-set-to-launch-bitcoin-futures-sunday-night.html
4. Retrieved 6 June 2018 http://www.cmegroup.com/trading/equity-index/us-index/bitcoin_contract_specifications.html
5. Retrieved 6 June 2018 http://www.scmp.com/business/markets/article/2141119/demand-institutional-investors-drives-bitcoin-futures-trading
6. Retrieved 6 June 2018 http://fortune.com/2017/12/20/etrade-cboe-bitcoin-futures-trading/
7. Retrieved 6 June 2018 https://www.edhec.edu/sites/www.edhec-portail.pprod.net/files/publications/pdf/edhec-working-paper-why-some-futures-contracts_1436277798888-pdfjpg
8. Retrieved 7 June 2018 https://news.bitcoin.com/bitcoin-futures-markets-see-a-big-uptick-in-trade-volume/
9. Retrieved 7 June 2018 https://cryptoslate.com/bitcoin-futures-posting-new-highs-in-daily-volume/
10. Retrieved 5 June 2018 https://www.statista.com/statistics/377382/bitcoin-market-capitalization/
11. Retrieved 6 June 2018 https://www.slickcharts.com/sp500
12. Retrieved 7 June 2018 https://www.lifewire.com/big-sites-that-accept-bitcoin-payments-3485965