The Chicago Mercantile Exchange (CME) launched its Bitcoin futures contract in December 2017, when the cryptocurrency had reached its peak of $19,800. However, by late 2018, the price had dropped to $3,100. Investors quickly realized that CME derivatives allowed them to make bullish bets with leverage and to bet against the price, a practice known as shorting.
The Securities and Exchange Commission (SEC) has previously denied Bitcoin exchange-traded fund (ETF) applications due to worries of manipulation on unregulated exchanges. The increasing importance of CME’s Bitcoin futures market may address this concern, and Hashdex recently requested a Bitcoin ETF based on Bitcoin’s physical trades within the CME market.
Traders often use BTC derivatives to hedge risks. For instance, one can sell futures contracts while simultaneously buying BTC using borrowed stablecoins using margin. Other examples include selling longer-term BTC futures contracts while purchasing perpetual contracts, which could help a trader capitalize on price discrepancies over time.
CME overtook Bybit to become the second-largest BTC futures market
Since 2020, CME has been a major player in the Bitcoin futures market, reaching an impressive $5.45 billion in open interest by October 2021. However, other exchanges such as Binance, OKX, Bybit and Bitget started to overtake CME, with their Bitcoin futures market reaching $1.2 billion in January 2023.
Recently, there was a 12.8% drop in the Bitcoin price between Aug. 16 and Aug. 17, which caused a $2.4 billion reduction in the aggregate futures open interest. Interestingly, CME was the only exchange that was unaffected in terms of open interest. Therefore, CME became the second-largest trading platform on Aug. 17, with $2.24 billion in BTC open interest, according to CoinGlass.
It is worth noting that CME only offers monthly contracts, which differ from perpetual or inverse swap contracts, the most traded products on crypto exchanges. Additionally, CME contracts are always cash-settled, while crypto exchanges provide contracts based on both stablecoins and BTC. These differences between CME and crypto exchanges explain the difference in open interest, but there is more to the story.
CME futures show discrepancies relative to crypto exchanges
In terms of both volume and pricing dynamics, the trading of Bitcoin futures on the CME is significantly different from that of most crypto exchanges, apart from differences in contract settlement and the absence of perpetual contracts. The CME records an average daily volume of $1.85 billion, which is lower than its $2.24 billion open interest.
However, Binance’s BTC futures have a daily volume of nearly $10 billion, which is three times greater than its open interest, while at OKX exchange, the daily trading in BTC futures reaches about $4 billion, surpassing its $1.4 billion open interest. This variance can be partially attributed to CME’s higher margin requirement and the fee-free trading environment for market makers on crypto exchanges, as well as CME’s trading hours being limited, with a halt from 4:00 pm Central Time to 5:00 pm and a full closure on Saturdays.
A number of factors contribute to the price distinctions compared to other exchanges. These include shifts in demand for leverage among long and short positions, along with potential discrepancies in the Bitcoin index price calculation across different providers. Additionally, it’s essential to take into account the solvency risks associated with the tie-up of margin deposits (collateral) until the BTC futures contract settlement.
Notably, CME Bitcoin futures have traded approximately $280 higher than those on Binance for the same December 2023 expiration. Ultimately, the daily pricing of BTC futures contracts is dependent on many variables. Despite CME’s trading volumes increasing, its pricing mechanism may not accurately reflect Bitcoin’s price movements on crypto exchanges.
Given the intricate interplay of variables influencing its pricing and trading dynamics, it fails to provide enhanced price guidance to BTC investors.
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