The price of an actual Bitcoin on the open crypto market, known as spot BTC, fluctuates based on a myriad of factors, such as trading volume, usage and adoption. However, other catalysts affect the activity in a roundabout. Cash-settled Bitcoin futures trading products from the Chicago Mercantile Exchange stand as a debatable highly referenced indirect element that contributes to the Bitcoin (BTC) price direction.
“The Bitcoin-derived products offered by CME are simply a tool for accredited investors to place sophisticated and offsetting transactions that would otherwise be inaccessible to them,” said Shawn Dexter, a decentralized financial analyst at Quantum Economics ̵
CME Bitcoin futures trading in its simplest way
At the height of Bitcoin’s largest bull run to date, CME launched cash – settled Bitcoin futures trading on December 17, 2017. However, cash – settled futures do not involve any actual spot BTC. They simply let traders bet on the future price of Bitcoin without using the underlying asset.
For example, let’s say that Bitcoin’s spot price is $ 10,000 per share. BTC at the beginning of a month and ending that month at $ 11,000. Buying a CME Bitcoin futures contract (equivalent to the price of five Bitcoin) when the BTC price is $ 10,000, and holding on to expiration at the end of the month, means that the trader receives $ 55,000 in cash at the end of month, not the actual Bitcoin.
Since trading does not involve any actual Bitcoin sale or purchase, these futures products can logically not seem to affect Bitcoin’s spot price. In reality, however, these futures weigh the price of Bitcoin according to Dexter:
In the short term, any price impact due to a sharp buy in the futures market will quickly be arbitrated away in the spot market, causing prices to converge. But this could just as well happen if the big purchase had to happen first in the spot market. ”
Sometimes Bitcoin trades at different prices on different exchanges based on events, order book demand and other factors. If there is a large enough price difference, a trader can buy BTC at a lower price on one stock exchange and sell it at a higher price on another stock exchange. This activity is called arbitrage.
The price of Bitcoin on CME futures is likely to increase significantly if someone bought a large number of Bitcoin futures contracts on CME. This does not move Bitcoin’s spot price directly, although eager traders will then buy or sell spot Bitcoin at a cheaper price as an arbitrage option, driving the spot price together, according to Dexter. This concept works in a series of scenarios between CME and spot BTC.
Over a larger time horizon, CME’s Bitcoin futures trading products affect Bitcoin’s spot price more significantly, Dexter explained, adding: “CME products allow for increased price stability and reduced risk. This is bullish for Bitcoin as it allows larger investors to get involved in the market with less hesitation. Thus, liquidity and stability increase. “Essentially, CME’s BTC futures are adding money to the market from major mainstream traders and other participants, while also allowing them to hedge their trades.
An explanation from a regulator
Commodity derivatives markets can affect their respective underlying spot markets, according to Heath Tarbert, chairman of the U.S. Commodity Futures Trading Commission. Derivatives include futures trading products. “Sometimes the price of cattle is actually set in the derivatives markets,” Tarbert told interviewer Anthony Pompliano on Oct. 7 as part of a segment during the LA Blockchain Summit. Cattle and Bitcoin are both considered commodities. Tarbert added: “People say, ‘Well, the futures contract for cattle says it should be x amount per capita, and that’s why the price should be in the real market.'”
Some commodity futures are settled physically, but involve the transfer of the underlying asset after maturity, and thus differ from CME’s Bitcoin futures trading products. Including similar findings, investment firm Wilshire Phoenix published a lengthy report on the CME BTC futures topic on October 14, 2020, citing the conclusion: “CME Bitcoin Futures contributes more to price discovery than its related spot markets.”
What about the CME holes?
The crypto space gives CME holes considerable weight. A gap in the CME Bitcoin futures chart occurs when the Bitcoin spot price moves while the CME Bitcoin futures markets are closed on weekends or holidays. If CMEs Bitcoin futures open for trading after a major move from Bitcoin, there is a gap in the chart between the quoted price when CME closed and the price of BTC when it opens.
The cryptocurrency often expects the price of Bitcoin to return to such levels and “fill in” any gaps in the chart. “Price does not have to trade in both directions through a hole to be considered filled,” Dexter explained. “A gap is considered filled as long as it meets the previously traded price before the gap.”
Trading is largely about probabilities. Probability favors gaps filling, according to Dexter, though he added, “It’s important to note that gaps do not necessarily need to be filled,” as gaps are found in the same category as other chart patterns:
“The previously traded price of CME prior to any gap could be interpreted as Bitcoin’s fair market price. In addition, depending on the type of gap, market participants are likely to open and / or close positions at the previously traded price, thus causing the gap to fill. ”
Contrary to market sentiment, which favors hole-filling, Melvis Langyintuo, a client solution strategist at OKCoin, told Cointelegraph on October 6 that CME Bitcoin hole-filling is unlikely due to CME’s lack of Bitcoin futures trading volume compared to crypto-native. exchange of derivatives.
Over the last 30 days, CMEs Bitcoin futures have yielded approx. $ 433 million in average daily volume, according to Langyintuo. In contrast, popular cryptocurrency derivatives BitMEX often hosts over $ 1 billion. $ I 24-hour trading volume. Over the past 24 hours, BitMEX’s Bitcoin perpetual swap futures product has hosted nearly $ 1.4 billion. $ In volume based on numbers posted on the stock exchange. Several other large-volume crypto-native derivatives exchanges also exist, and these exchanges trade throughout the weekend, while CME Bitcoin futures do not, which adds to the equation.
“This makes the CME hole inconsistent with BTC potentially filling the gap,” Langyintuo said. “CME BTC prices either follow the BTC price movements or they are a bet on where the CME BTC market may reopen on Monday,” he added. “Trading CME futures over the weekend is essentially like putting a weekend ‘put’ or ‘call’ on the gap to capture the spread,” he explained, referring to a similarity to Bitcoin option trading – another type of derivative seen on CME and in the crypto space. Langyintuo concluded:
“For the price to fill the gap, there must be a lot of volume on both the bidding and supply side of the futures contract before the weekend, and on Sunday, when the market resumes trading, the same volume levels must be maintained to normalize the gap evenly. ”
A large number of forces affect Bitcoin. A conclusion can be difficult when it comes to how much influence a particular driver has, although in this case it seems that CME’s Bitcoin futures can affect Bitcoin’s spot price on a number of levels.