Bitcoin Futures Specifications: Cboe and CME

While Cboe Bitcoin futures was the first to launch, the CME Group is considered to be the world’s largest futures exchange.

Both exchanges have opened the door for the larger institutional investors to get in on the Bitcoin game through a more regulated, transparent and liquid market.

Since Bitcoin is a virtual currency, settlements will be cash-based and in U.S Dollars and unlike the cryptomarkets, where trading is 24-7, the futures exchanges are not, with more regular trading hours and limited to 6-days per week.

There are some key differences between the two exchanges and what’s on offer for those looking to hedge exposure to Bitcoin or speculate on future prices and some of the key differences include:

• CME Group’s Bitcoin futures contract price will be based on a large number of exchanges, from which the CME CF Bitcoin Reference Rate (BRR) is derived on a daily basis. In contrast, the Cboe futures prices are based on a closing auction price of Bitcoin on a single Bitcoin exchange known as the Gemini exchange.
• With cryptocurrencies having experienced significant volatility, it comes as no surprise that both exchanges have quite high margin requirements. CME Group’s Bitcoin futures margin requirement is 35%, whilst Cboe’s is 40%. The size of a margin requirement is a reflection of asset class volatility. To put it into perspective, the margin for an S&P500 futures contract is just 5%.
• Both exchanges involve cash settlement of futures contracts on expiration date
• On the Cboe futures exchange, a contract unit is equivalent to 1 Bitcoin, while on the CME Group exchange, one contract is equivalent to 5 Bitcoins.
• Contract expirations also differ. The CME Group will have futures contracts that expire in the nearest 2-months in the March quarterly cycle and the nearest 2-months outside of the quarterly cycle. In contrast, the Cboe group will list 3 near-term serial month contracts, before including 4 near-term expiration weekly contracts, 3 near-term serial months and 3-month March quarterly cycle contracts.
• Clearing on the CME Group exchange is via CME ClearPort, while the Options Clearing Corporation is used for the Cboe exchange.
• Limits are also in place on how far the respective exchanges allow prices to move before temporary and permanent halts are triggered. On the Cboe exchange, contracts are subject to a 2-minute halt should the best bid or offer price, in the first contract to expire, move by 10% from the prior day’s close. Upon resumption of trade, should the contract price move by 20% above or below, trade is halted for 5-minutes. On the CME Group exchange, contracts will be halted on price move limits of 7%, 13%, and 20%
• On the CME exchange one other distinct difference in the halt rules is that in the event of the contract hitting the 7% or 13% limit, trading continues without a halt as long as the price remains within the price limit for a 2-minute period. In event that the price falls back from the limit, the halt limit is raised to the next, whether 13% or 20%. In event that the contract price hits the 20% limit, there is no halt in trading and trading will simply continue within the 20% limit through the remainder of the session.

How to Buy and Sell Bitcoin Futures?

Bitcoin futures based on Gemini’s auction prices are available for trading solely on Cboe’s Futures exchange. Brokers that offer the trading of XBT (Cboe Bitcoin futures) futures include Advantage Futures, Interactive Brokers, Straits Financial, and TradeStation.

For CME Group Bitcoin futures, trading is made available on CME Group’s own site, whilst CME Group also provides a list of brokers and block liquidity providers for those looking to execute block trades or are looking for an intermediary.

For those looking to enter the Bitcoin futures market, the first and fundamental question is whether the motivation is speculative or to protect current Bitcoin earnings from any downside.

Choice of exchange may be considered arbitrary, but it would be best to go with the exchange with the greatest number of futures contracts issued, as both will be considered liquid from an investor perspective.

As we addressed before, contract sizes differ on the respective exchanges as do margin requirements, so these are also considerations.

When looking to trade with margin, this is essentially the funding component of the trade executed on the futures exchange. As investors will not actually own Bitcoin itself, there is no need for the full value of the purchase to be paid in advance of the contract expiry date. In the event of an investor holding a contract until the expiration date, the amount paid, if out of the money, is limited to the difference between contract price and the actual price. The margin is placed on a margin funding account as collateral for the trade.

In addition to the collateral, also referred to as initial margin, investors are required to meet Mark-to-Market calls during the duration of the futures contract. The Mark-to-Market (“MTM”) margin is the difference between the cost of the position held and the current market value (“CMV”) of the position. In the event of a loss, the exchange will fund any margin shortfalls stemming from a MTM call from the investor’s margin funding account. The reverse is also possible, where the exchange funds the account where the investor has margins in excess of the required amount.

In the event that the margin funding account falls below acceptable levels, the investor will then be required to fund the account to meet future MTM requirements.

As we mentioned above, contract sizes between the 2 exchanges are different, with the minimum contract size on the CME Group exchange being 5 Bitcoins, compared with 1 Bitcoin on the Cboe exchange. For institutional investors this may be less of an issue, but for a retail investor, that’s a minimum margin of $33,250 based on a Bitcoin value of $19,000 on the CME Group exchange, compared with a margin of $7,600 on the Cboe exchange, assuming an investor is looking for the smallest size contract.

Final settlement on both exchanges is in U.S Dollars, with no actual Bitcoins held during the duration of the contract that requires settlement. With futures contracts being a 2-sided market, involving a buyer and a seller, counterparty risk on the final settlement is absorbed by the respective clearing houses and not the party in the money.

It’s worth noting that, while those looking to hedge Bitcoin’s value are likely to hold futures contracts through the expiration, speculators are likely to be buying and selling Bitcoin ahead of expiration, taking advantage of daily movements in response to market noise. For this reason, market liquidity is particularly important for those holding futures contracts as an inability to find a buyer can have quite dire consequences to the futures market and the price of Bitcoin itself.

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How Can Bitcoin Futures Affect Bitcoin Trading?

Since the launch of the Cboe and CME Bitcoin futures, Bitcoin has received a double bounce in value, with the upside in Bitcoin coming off the back of Bitcoin futures valuations on each of the individual launch dates.

The gains have come off the back of Bitcoin futures seeing an uptick in value above Bitcoin’s actual value at the time of launch of each of the respective exchanges. With the general theory being that the smarter institutional money is going into the Bitcoin futures market, investors in Bitcoin will be looking towards the futures market as a guide to the future direction of Bitcoin, based on information available in the marketplace.

Added to the influence of both the Cboe and CME group Bitcoin futures is the fact that both provide investors with the option to go long or short. Increased appetite for lower prices would see the value of Bitcoin futures contracts decline, which would likely lead to price declines in Bitcoin itself. When we look at the Dow mini or the S&P500 futures, daily movements have a material impact on the direction of the main indexes each day, barring the arrival of new information to which investors respond during normal trading hours.

For now, the number of contracts is considered relatively small and investors may take less direction from the respective exchanges, but we will expect the number of contracts to grow over time and provide some idea on which direction Bitcoin will take on a given day.

We would expect the CME Group contracts to have a greater impact on the price of Bitcoin since the futures price will be based on Bitcoin’s price from a number of Bitcoin exchanges, not to mention the CME Group’s status in the futures market.

For those looking for the latest futures contract prices on the respective exchanges: CME Group, Cboe

For those who are interested in Bitcoin and other cryptocurrencies trading, below is a list of our recommended brokers.