The dust hasn’t settled off the announcement that CME is launching Bitcoin Futures and already there’s mountains of speculation of what they means for the cryptocurrency. It looks like the contract will start trading the second week of December. While we wait, CME’s Chariman Leo Melamed, says this futures contract will “tame” the Bitcoin market.
“That’s a very important step for bitcoin’s history… We will regulate, make bitcoin not wild, nor wilder. We’ll tame it into a regular type instrument of trade with rules,”
It seems the CME has since softened their own stance, with CEO Terry Duffy saying it’s the job of the market to stabilize the volatility.
“I’m not trying to rein in the volatility of bitcoin,” Duffy said. “But what I want to do is give it a place for other people to lay out that risk. Today you cannot short bitcoin. So there’s only one way it can go. You either buy it or sell it to somebody else. So you create a two-sided market, I think it’s always much more efficient.”
Josh Brown aka Reformed Broker seemed to be walking on air in Wonderland after attending a Bitcoin get-together in an alley in NYC (we didn’t know NYC had alleys?) and added his own two cents about the taming of Bitcoin:
So, I’m not sure that the thing gets tamed so much as turned into yet another mainstream trading vehicle that people of all levels of experience and sophistication will use to act like children.
Taming or no taming, time and money will be the ultimate testament to whatever verdict lies ahead for Bitcoin and Bitcoin futures. But before it goes live, traders are going to want to know the contract specs, per the CME:
5 bitcoin, as defined by the CME CF Bitcoin Reference Rate (BRR)
Minimum Price Fluctuations:
Outright: $5.00 per bitcoin = $25.00 per contract
Calendar Spread and Basis Trade at Index Close (BTIC): $1.00 per bitcoin = $5.00 per contract
CME Globex and CME ClearPort: 5:00 p.m. – 4:00 p.m. CT Sunday – Friday
BTIC: 5:00 p.m. – 10:00 a.m. or 11:00 a.m. CT (4:00 p.m. London Time) Sunday – Friday
Nearest 2 months in the March Quarterly cycle (Mar, Jun, Sep, Dec) plus the nearest 2 “serial” months not in the March Quarterly cycle.
Contract months for initial listing: Dec 2017, Jan 2018, Feb 2018, Mar 2018.
Termination of Trading
Last Day of Trading is the last Friday of contract month.
Trading in expiring futures terminates at 4:00 pm London time on Last Day of Trading.
Spot Position Limits are set at 1,000 contracts. A position accountability level of 5,000 contracts will be
applied to positions in single months outside the spot month and in all months combined. The reportable level will be 25 contracts.
$5 in Bitcoin = One Tick Move
The interesting thing that jumped out to us in the contract specs was the larg-ish minimum tick size. The CME has set the tick movement at five full points, so the futures would go from $6,250 to $6,255 in a single tic. That’s much larger than say crude oil at $0.01 or e-mini S&Ps at .25x the index. But when Bitcoin is sitting at $6,500 per bitcoin, it sort of makes sense that the price would be intervals of dollars instead of dollars themselves, or even cents on the dollar. The CME is betting, it seems, that the price of Bitcoin doesn’t go back below $5, where it spent the first year and a half of its life. If it did, would we see prices jumping between $0 and $5 each tic? That would be something, and seemingly outside the realm of possibility… excepting the big fluctuations in Bitcoin. Just in the past couple of days, Bitcoin fluctuated between 6,000 and 7,900, and using the historical data the CME provides dating back to November of last year – we find the annualized volatility of Bitcoin at about 80%.!?!? That’s four times the volatility of the newly launched FANG+ Futures and six times the volatility of the emini S&P!
Trading Level Limit
Here’s where the “taming” may come into play, with the CME setting daily trade limits:
Special price fluctuation limits of 7 percent and 13 percent above and below the bitcoin futures’ prior settlement price, and a price limit of 20 percent above or below that level.
This is a sensible idea, and one of the silver linings of the Black Monday crash was the implementation of price limits/circuit breakers in stock index and futures markets. But coordinated circuit breakers/speed bumps across centralized exchanges are one thing – a centralized exchange setting a limit with dozens of de-centralized exchanges having no such limit is quite another. We’ll get to see in real time whether the tail or the dog is in charge when and if these limits get breached – with the futures price limits either slowing down the ‘cash’ bitcoin prices fall, or people racing to the cash market to continue selling Bitcoin when unable to in the futures market because of a locked limit situation (see here for more on limit moves in futures).
We expected a market with this much volatility would require a bit more margin than your typical futures contract… perhaps on the range of the VIX futures margin requirements. And, yes, it is large, with the CME setting margin between 25-30%. Margin can be roughly thought of as the amount that the exchange wants customers to have in their accounts to cover a 1 day loss, so 30% is telling you they don’t see this normalizing in terms of volatility any time soon.
As of November 1, the indicative Initial Margin for BTC futures is 25-30%. This is subject to change, and is being reviewed on an ongoing basis.
What does 30% margin equate to in terms of money needed in your account to trade these futures. Well, with Bitcoin at around $6,500 and the contract worth 5 bitcoin, the nominal size of the contract (as of today) would be $32,500 worth of Bitcoin. 30% of that is $9,750. So, you’re looking at needing about $10,000 to “own” exposure to 5 bitcoins, which seems far better than shelling out tens of thousands to some unregulated offshore Bitcoin exchange (which is exactly what the futures exchanges are betting on..)
Investing in Bitcoin Futures
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Article by RCM Alternative