What Are Bitcoin Exchange Futures?

Bitcoin futures opened for trading on the Cboe Futures Exchange, LLC (CFE) on December 10, 2017. Cboe was joined by CME Group on December 18, 2017. In March of 2019, Cboe announced that it would bow out of the Bitcoin futures market. Bitcoin futures trading marked one of the biggest milestones for bitcoin since it emerged in the wake of the 2008 to 2009 financial crisis. Bitcoin futures bring much-needed transparency, greater liquidity, and efficient price discovery to the ecosystem.

Key Takeaways:

  • Bitcoin futures opened for trading on the Cboe Futures Exchange, LLC (CFE) on December 10, 2017.
  • Cboe was joined by CME Group on December 18, 2017; Cboe later ceased bitcoin futures trading on its exchange.
  • Bitcoin is known for its volatile price movements, which makes it a risky investment.
  • Bitcoin futures trading is done online through a marketplace and by matching the buy and sell orders placed on the system of the exchange.

Understanding Bitcoin Exchange Futures

On October 31, 2017, CME Group, the world's leading and most diverse derivatives marketplace, had announced its intent to launch bitcoin futures in the fourth quarter of 2017. The exchange allowed exposure to bitcoin without the need to hold any of the cryptocurrency.

 

 

 

CME

 

Listing Date

 

Effective December 17, 2017 for trade date of December 18, 2017

 

Ticker

 

BTC

 

Contract Unit

 

Equal to 5 bitcoins

 

Description

 

CME Group's Bitcoin futures will be cash-settled, based on the CME CF Bitcoin Reference Rate (BRR) which serves as a once-a-day reference rate of the U.S. dollar price of bitcoin.

 

Pricing

 

USD

 

 

 

 

 

 

 

Settlement

 

The contract will be prices off of the CME CF Bitcoin Reference Rate (BRR) which has been designed around the IOSCO Principles for Financial Benchmarks. Bitstamp, GDAX, itBit and Kraken are the constituent exchanges that currently contribute the pricing data for calculating the BRR.

 

 

 

Trading Hours

 

CME Globex and CME ClearPort: Sun-Fri 6:00 p.m. to 5:00 p.m. (5:00 p.m. to 4:00 p.m. CT) with one-hour break beginning at 5:00 p.m. (4:00 p.m. CT)

 

Margin Rates

 

37%

 

Clearing

 

CME ClearPort

 

Contract Expirations

 

Nearest 2 months in the March Quarterly cycle (Mar, Jun, Sep, Dec) plus the nearest two “serial” months not in the March Quarterly cycle.

 

 

Bitcoin Exchanges

Bitcoin volatility has been a concern of potential investors and traders. The huge fluctuations have mainly been due to a lack of confidence in the bitcoin system, its fragile reputation, and its extreme reaction to bad news, which often leads to a steep price drop before a price rise.

While volatile movements detract from the appeal of any asset, a certain amount of swing in price creates trading opportunities. This is something that many traders and speculators have been taking advantage of by buying the digital currency and then selling it at a profit through an exchange. The whole process makes bitcoin exchanges an important part of the ecosystem since it facilitates the buying and selling of bitcoins as well as futures trading.

A bitcoin exchange operates somewhat similarly to online stock trading brokers where customers deposit their fiat currency (or bitcoins) to carry out trades. However, not all bitcoin exchanges offer such services. Some exchanges are more like wallets and thus provide limited trading options or storage of currency (both digital and fiat) for trading. The bigger and more elaborate exchanges offer trades between different cryptocurrencies and between digital and fiat currencies. The number of currencies supported by an exchange varies from one exchange to another.

How to Buy and Sell Bitcoin

Typically exchanging is done through matching the buy and sell orders placed on the system of the exchange. The sell orders are made at an offer price (or ask) while the buy order (or bid) is made to buy bitcoins. It is similar to buying stocks online where you need to enter the desired price (or market price) for buy/sell along with the quantity. These orders enter the order book and are removed once the exchange transaction is complete.

Anyone interested in buying bitcoins needs to deposit funds in U.S. dollars, euros, or another currency supported by the exchange. The popular methods of transferring money to the currency exchanges are through bank wire transfers, credit cards, or liberty reserves. One of the pre-requisites here is to have a digital wallet to hold bitcoins. Bitcoins bought can be stored in a digital wallet, device, or paper wallet, depending on the buyer’s preference. For sellers, the fiat currency for which the bitcoins have been sold needs to be withdrawn from exchange and sent to a bank.One issue that can arise is if the exchange has liquidity concerns at a particular point in time; such situations can delay withdrawal and transfer of funds into a bank account.

Some exchanges offer trading on margin. When such an option is available, Bitcoiners are allowed to borrow funds from peer liquidity providers to carry out trades. The term "liquidity provider" refers to those who are ready to deposit their bitcoins and/or dollars with the exchange for use by others for a certain pre-fixed duration, rate, and amount. For example, say a bitcoiner wants to buy 20 bitcoins, they are anticipating that its price will rise in the future and hope to profit by selling them at a later date. If the person does not have sufficient funds to buy the 20 bitcoins, the margin facility allows him to borrow the amount required (20 X the price of bitcoins in USD) from a liquidity provider. When the bitcoiner chooses to close the position, they must repay the amount borrowed plus the interest accrued during this period. Remember that the amount accrued (loan + interest) needs to be reimbursed regardless of profit or loss at the time of settlement.

Additionally, a maintenance margin needs to be maintained in the trading account used to cover the losses incurred during trading. As the account is depleted, a margin call is given to the account holder.

Futures Explained

A futures contract is a technique to hedge positions and reduce the risk of the unknown. It is also used for arbitrating between current spot and future contracts. In the case of bitcoins, futures have been more associated with miners who face the risk of unknown future prices. OrderBook (formerly iCBIT), a futures marketplace operating since 2011, sells millions of futures contracts each month. The standard contract size (or tick size) is $10. A typical instrument would look like this: BTC/USD-3.18. Here "BTC/USD" signifies the rate of exchange between Bitcoin and US dollar, "3" means the month of March, and "18" signifies the year 2018. The trading symbol for the same instrument will be BUH8. Each month has a trading symbol, for example, March is H (as per Chicago Mercantile Exchange), the "B" is taken from BTC and the "U" from USD, and "8" signifies the year.

In a futures market, if the price is $500/BTC, an investor needs to buy 50 futures contracts, each worth $10. If an investor wishes to open a positive position then they go long with “buy" contracts. If they decide to open a negative position, they go short with “sell” contracts. An investor’s position can be either positive or negative for the same instrument.

Special Considerations for Bitcoin

A bitcoin (spot or futures) exchange (like any online trading firm) charges its clients a fee to carry out trading activities. As exchanges face the risk of hacking and theft, it is wise not to trust an exchange with all your coins. You should split them and keep part of them in other devices or cold storage. Now with bitcoin futures being offered by some of the most prominent marketplaces, investors, traders, and speculators are all bound to benefit. These centralized marketplaces will facilitate trade based on a trader’s outlook for bitcoin prices, gain exposure to bitcoin prices, or hedge their existing bitcoin positions. Overall, the launching of bitcoin futures by CME has facilitated price discovery and price transparency, enabled risk-management via a regulated bitcoin product, and given a further push to bitcoin as an accepted asset class.