The Chicago Mercantile Exchange (CME) launched bitcoin futures contracts in December 2017. Around the same time, Bitcoin (BTC) reached an all-time high of $19,800, but by the end of 2018, the price had fallen to $3,100. Cryptocurrency investors quickly learned that CME derivatives contracts allowed them to make bullish bets using leverage, but also enabled them to bet on price, a practice known as shorting.
Historically, the SEC has rejected proposals for bitcoin exchange-traded funds (ETFs) due to concerns about manipulation by unregulated exchanges. The growing importance of the CME Bitcoin futures market may address this issue, and recently, Hashdex even called for the creation of a Bitcoin ETF that relies on physical trading of Bitcoin within the CME market.
Professional traders often use BTC derivatives to hedge their risk. For example, one could sell a futures contract while using borrowed stablecoins to buy bitcoin using margin. Other examples include selling long-term bitcoin futures contracts while buying perpetual contracts, which can help traders benefit from long-term price differences.
CME Overtakes Bybit to Become Second Largest Bitcoin Futures Market
Since 2020, CME has played a key role in the Bitcoin futures market, and its open interest has reached an impressive $5.45 billion in October 2021. Over the next few years, however, the gap widened, with CME’s bitcoin futures market reaching $1.2 billion in January 2023, trailing behind exchanges such as Binance, OKX, Bybit, and Bitget.
Most recently, the 12.8 percent drop in bitcoin prices between Aug. 16 and Aug. 17 resulted in a $2.4 billion drop in total futures open interest. Notably, CME Group was the only exchange whose open interest was not affected. CME became the second-largest trading platform on Aug. 17, with $2.24 billion in bitcoin open interest, according to data from CoinGlass.
Notably, CME Group exclusively offers monthly contracts, as opposed to perpetual contracts or inverse swaps, the most traded product on the cryptocurrency exchange. Additionally, CME contracts are always cash-settled, while cryptocurrency exchanges offer contracts based on stablecoins and BTC. These differences lead to differences in open interest between CME and cryptocurrency exchanges, but there is more to the story.
CME Group Futures Are Different From Crypto Exchanges
In addition to differences in contract settlement and the lack of perpetual contracts, CME’s bitcoin futures trading differs significantly from most cryptocurrency exchanges in terms of volume and pricing dynamics. The CME’s average daily volume of $1.85 billion was below its $2.24 billion in open interest.
By comparison, Binance’s BTC futures trade nearly $10 billion in daily volume, three times its open interest. A similar pattern was observed on the OKX exchange, with Bitcoin futures reaching about $4 billion in daily trading volume, outpacing its $1.4 billion in open interest. This difference is partly attributable to CME’s higher margin requirements and the free trading environment for market makers on cryptocurrency exchanges. Additionally, trading hours on the CME are limited, suspended from 4:00 pm to 5:00 pm Central Time, and fully closed on Saturdays.
However, multiple factors contribute to the price difference compared to other exchanges. These include changes in leverage requirements between long and short positions, and potential differences in bitcoin index price calculations between different providers. Finally, it is important to consider the solvency risk associated with margin deposits (collateral) prior to settlement of BTC futures contracts.
Related: When Is It Too Late To Invest In Bitcoin?
Notably, CME Bitcoin futures are trading about $280 more than Binance’s Bitcoin futures at the December 2023 expiry. Ultimately, the day-to-day pricing of bitcoin futures contracts depends on several variables. While CME Group’s trading volumes are trending upwards, its pricing mechanism may not perfectly reflect Bitcoin’s price movements on cryptocurrency exchanges.
It fails to provide enhanced price guidance for BTC investors given the intricate interplay of variables affecting its pricing and trading dynamics.
This article is for general informational purposes only and is not intended and should not be construed as legal or investment advice. The views, ideas and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.