The Chicago Mercantile Exchange Group, the globally recognized futures and options exchange, has recently announced the launch of Bitcoin futures by year-end. As a response to the announcement, Bitcoin has broke a new record by passing $7,000.
Capitalizing on Evolving Markets
The official report stated that, “Given increasing client interest in evolving cryptocurrency markets, we have decided to introduce a bitcoin futures contract”. Terry Duffy, CME’s Group Chairman and CEO, also explained that,
“As the world’s largest regulated FX marketplace, CME Group is the natural home for this new vehicle that will provide investors with transparency, price discovery and risk transfer capabilities.”
Duffy told CNBC that he is very confident that CME’s application will be accepted pending the US Commodity Futures Trading Commission. He concluded by saying that, “They understand our application and they understand our model very, very well”.
The contract is based on the CME CF Bitcoin Reference Rate (BRR). While the bitcoin futures contract would be settled in cash, the BRR acts as a daily settlement price of the U.S. dollar price of bitcoin. This rate was launched by CME in November 2016 through the London-based digital trading platform Crypto Facilities Ltd. CEO of the trading platform, Dr. Timo Schlaefer, explained that, “The BRR has proven to reliably and transparently reflect global bitcoin-dollar trading and has become the price reference of choice for financial institutions, trading firms and data providers worldwide.”
Beyond this initiative, CME and Crypto Facilities also publish the Bitcoin Real Time Index (BRTI), which provides price transparency throughout the bitcoin market. This index works by combining global bitcoin trading demand in a consolidated order book and subsequently reflects the instant fair U.S dollar equivalent in a spot price. BRTI is further used to prevent and manage risk in so far as it is suitable for marking portfolios.
The Chicago Board Options Exchange
CBOE, the largest US options exchange, explained its future exchange has proposed to offer cash-settled bitcoin futures in the forthcoming year. This report, however, is still pending review from CFTC. The chief strategy officer of CBOE Holdings, John Deters, is convinced that, “Cryptocurrencies are here to stay”. The exchange group will be using data collected by Gemini Trust, the digital currency exchanged founded by Tyler and Cameron Winklevoss.
This move to exchanging derivatives also spells a more legitimate future for bitcoin and other cryptocurrencies seeking to be legally traded. In a conversation with CNBC, the CIO of BlockTower Capital, Ari Paul, said that, “The addition of CFTC-regulated bitcoin derivatives will bring a great deal of liquidity and legitimacy to the cryptocurrency ecosystem”. The added advantage being that investors now have a more traditional route, via derivatives, to accessing the digital currency market.
Another New York-based exchange, LedgerX has received approval from CFTC in July. This enables them to clear derivatives and ensure institutional credibility for clients looking to trade bitcoin options. CEO, Paul Chou, also reported that LedgerX has already cleared $3 million in the first two weeks of trading.
The Move to Derivatives
Conclusively, Bitcoin price growth has shown a strong response to the recent announcement made by CME. Not only that, but this also implies that bitcoin future trading will be dealt with using the same risk management strategies. It is the latter that will most certainly attract a large investing audience.
In order to promote digital currency as a more established digital asset, a critical step has been taken in the form of trading bitcoin derivatives. Many experts are complimentary of the rising bitcoin price with some expecting a massive rise shortly after the year 2020. In a recent publication, some specialists in the field predict massive growth by 2022 due to the emergence of products like those of CME and CF.
In any case, the introduction of regulation and certification has had an overall positive effect on the bitcoin price. This may spell further legitimization down the road, as well as supplementary markets surrounding cryptocurrencies.