The Impact of Bitcoin Futures Trading on CME on Bitcoin Pricing: A 2017 Review

The price of Bitcoin is influenced by a myriad of factors, from trading volume and usage to adoption. However, certain events can have indirect but significant impacts on its value. One such event was the launch of cash-settled Bitcoin futures trading on the Chicago Mercantile Exchange (CME) in December 2017. This article explores how this development affected the price of Bitcoin in 2017, the mechanisms behind it, and the broader implications for the cryptocurrency market.

Understanding CME Bitcoin Futures Trading

CME launched its Bitcoin futures trading as part of its broader product suite in December 2017. CME Bitcoin futures are cash-settled products, which means they don't involve actual Bitcoin; instead, they enable traders to bet on the future price of Bitcoin without holding the underlying asset.

For example, if the spot price of Bitcoin is $10,000 at the beginning of a month and rises to $11,000 at the end, a trader could buy a CME Bitcoin futures contract equivalent to the price of five Bitcoin when the price is at $10,000. By holding this contract through the expiration at the end of the month, the trader would receive $55,000 in cash rather than actual Bitcoin.

How CME Bitcoin Futures Increased Demand and Legitimacy

The introduction of CME Bitcoin futures inadvertently increased demand for Bitcoin. By providing a regulated and audited platform for trading, it created more buzz and gave more legitimacy to an agreed-upon price. This development indicated that institutions and accredited investors were placing faith in cryptocurrency, which many institutional investors were looking for.

Implications for Institutional Investors

Institutional investors naturally seek vehicles that offer risk management and access to sophisticated financial products. The launch of CME Bitcoin futures provided them with a credible option to invest in Bitcoin. Shawn Dexter, a decentralized finance analyst at Quantum Economics, noted, "The Bitcoin derivative products offered by CME are simply a vehicle for accredited investors to place sophisticated and risk-offsetting trades that would otherwise be inaccessible to them."

This access to risk management tools and the ability to speculate on future prices opened up new possibilities for institutional and retail investors alike. However, the impact on the price of Bitcoin was not immediate and was influenced by several factors.

Challenges and Limitations

While CME Bitcoin futures provided new opportunities, they also came with challenges. For instance, the futures contract does not involve actual Bitcoin, so it doesn't provide the same security or direct exposure to the asset. Additionally, holding the underlying asset can be beneficial in the long run, especially if the price of Bitcoin continues to rise.

Holding futures does not necessarily guarantee better returns. As one investor pointed out, "If BTC keeps going up, holding futures makes short-term or 60/40 capital gains a certainty. Why not hold the underlying and avoid that payout?" Furthermore, the cost of rolling over futures contracts and the lack of physical possession of Bitcoin in the event of regulation can be significant drawbacks.

While some see the low volume of trades as a sign that these futures contracts are not yet attracting widespread institutional interest, the overall sentiment suggests a positive view towards the future of regulation and institutional adoption.

Conclusion

The launch of CME Bitcoin futures in December 2017 marked a significant milestone in the integration of cryptocurrency into the traditional financial system. While it didn't immediately lead to a change in the price of Bitcoin, it did increase demand for the asset and provided a new avenue for institutional investment. As the cryptocurrency market continues to evolve, the impact of such initiatives will be even more pronounced, potentially reshaping the way Bitcoin and other digital assets are traded and valued.

Further Reading

For more information on the impact of Bitcoin futures trading on CME and its implications for the cryptocurrency market, refer to the following sources: