The Chicago Board Options Exchange (CBOE) launched their Bitcoin Futures trading on Sunday evening to cautious optimism in the Crypto community. Bitcoin’s price volatility was front and center, as futures trading paused twice within the first few hours under an automated CBOE policy that goes into effect when prices move at least 10%. This system is in place to control wild swings in either direction, but is a rare event for most traded commodities, like Wheat, Frozen Orange Juice Concentrate (“Coming to America” anyone?), or even Bitcoin’s IRL comp, Gold.
Since trading began, Bitcoin has stayed around $16-17,000, alleviating many of the initial fears around the futures launch. Bitcoin Futures are “cash settled,” meaning that those participating in this market do not have to buy or hold Bitcoins, but rather settle the difference between the contract price and the actual price on the contract expiration date in fiat currency (USD). This point has caused the most uncertainty as to the effect on the price of Bitcoin.
With that in mind, it’s important to understand that not all futures markets are created equal. Investors and traders should not 100% expect the upcoming Chicago Mercantile Exchange (CME) launch to mirror the CBOE.
The most important difference is the size of the two exchanges. Not only are there more traders on the CME, but the contract sizes will also be larger. On the CME, traders will have to set a minimum contract of 5 BTC compared to 1 BTC on the CBOE. More traders required to trade more money could have a much larger impact on the market.
There is still a strong Bull Market Case that the CME gives institutional traders the opportunity to protect their Bitcoin position against the potential downside with futures contracts (they don’t call them Hedge Funds for nothing!). However, it’s also a bigger stage for the short selling that could cause downward pressure on the price of Bitcoin.
Be careful out there.
Editors note: (Monday Dec. 18th, 2017 marked the first day of CME trading).