CME Bitcoin Futures Explained; Here’s What You Need To Know
The challenges of getting into bitcoin investment or the attendant high volatility scare a few would be investors. But with futures, traders can earn when prices go higher or fall.
CME Bitcoin Futures were launched by the CME Group, the biggest futures exchange. It began trading when bitcoin was at its all-time high of $20,000.
Many crypto enthusiasts look at Bitcoin Futures as one way through which the market will appeal and attract institutional investors and traders.
The result is to bring some legitimacy to a market that has been dominated by its volatility.
CME and CBOE futures
The CME Bitcoin Futures contracts were launched in December 2017, a week after CBOE had launched their Bitcoin futures.
Bitcoin futures contracts are traded on CME Globex and CME ClearPort. The trading begins at 5 p.m. and ends at 4 p.m. from Sunday to Friday.
Although both contracts are settled in cash, the Cboe contract involves one bitcoin. On the other hand, the CME contract covers five bitcoins.
It is important to take note of this because the CME gives you five times more exposure compared to Cboe. CME futures products will, therefore, be the total value of five bitcoins.
The CME futures have something called “a spot position”. This is a set limit of 1,000 contracts. Futures contracts have always had limits to how many contracts an individual or entity owns.
It helps to avoid scenarios where a few individuals or entities end up “cornering the market”.
A margin is the total amount an investor has to put up as collateral in order to take up a position. If a contract is heavily traded, the margin value is pegged at 10% of the total price value of five bitcoins.
When trading CME contracts, the initial margin is set at 47%. Margin levels are bound to change from time to time depending on the volatility.
Futures contracts usually are subject to certain limits with regard to just how far prices can go before they trigger either a temporary or permanent halt.
The CME Bitcoin futures are subject to fluctuation limits on a daily basis. There are limits set at 7%, 13%, and 20% to either side of an upside or downside.
The CME price index is currently updated every other minute. According to the Group, the price limit is “suitable for marking portfolios, executing intraday bitcoin transactions and risk management.”
To determine the official value of any given contract, CME uses what it calls Bitcoin Reference Rate (BRR). The average prices of Bitcoin from a number of exchanges over the course of an hour. The BRR helps to safeguard against market manipulation of prices.
Bitcoin Futures are legal
Trading Bitcoin futures is legal in all states in the US. To trade futures contracts, an investor doesn’t need to have any Bitcoin.
What an investor does is to find another investor or trader who will take the opposing bet. Traders go online to find other traders who’ll offer the opposite wager.
One wager goes long while the other goes short. The loser pays the winner, depending on the outcome of the “bet”.
Bitcoin futures are leveraged
Futures contracts allow leveraging and thus afford traders the chance to multiply winnings or losses depending on whether Bitcoin prices rise or decline.
The CME Group allows a 47% initial margin requirement. So, for one to purchase a CME futures contracts, they need an outlay of 47% of the current price multiplied by 5.
For instance, at current prices of $6,600, each contract will have a notional value of $33,000. Therefore, one would need $15,510 to benefit from a futures contract worth $33,000.
If you have some bitcoin, you can head over to a futures exchange and trade Bitcoin for Bitcoin futures. On the CME, you will need to have at least five bitcoins.