Since launched back in December 2017, the CME Bitcoin futures (Chicago Stock Exchange) has been regarded as a bearish instrument. After all, its first trading week marked the $20,000 Bitcoin “bubble burst”.
What are CME Bitcoin futures?
A futures contract is an obligation to transact an asset at a predetermined future date and price. For example, a buyer (long) and the seller (short) might settle on $50,000 at Bitcoin for Dec 31, 2021.
In the futures contract, both sides are required to post margin, also known as collateral. Thus, if the price goes up, the seller is obliged to increase his deposit. On the other hand, lower Bitcoin prices mean that the buyer needs to increase margin.
It is crucial to understand that the CME contract is financially settled, which means no Bitcoin delivery upon maturity. In other words, it is basically a monetary bet between two parties.
How Much do CME Bitcoin Futures Trade?
The average daily volume over the last three months was U$ 2.4 billion. However, the most significant metric is open contracts, as it measures the outstanding bets for the upcoming months, regardless of whether they continue to be traded.
The current open interest for Bitcoin futures at CME is US$ 1.5 billion, which compares to gold’s US$ 2.9 billion.
Balanced Buyers and Sellers
Despite the size between longs and shorts being balanced at all times, some of these investors are not concerned about price changes.
For example, an investor can buy Bitcoin at a spot exchange and send it to his wallet while selling the equivalent amount in the futures contract. Therefore, this investor has no price exposure.
Such a trade is often carried out by arbitrators and is common when futures contract trade at a higher price, known as a premium. This price gap is even more evident during bull markets.
Can Buyers also be Neutral?
Yes, such a situation happens in arbitrage transactions. For example, one can buy the October contract, and simultaneously sell the December one.
In this instance, the change in Bitcoin price does not directly influence the outcome. Similar cases occur when the investor has a negative exposure using options markets, thus buying futures to hedge his position.
How do you Know Which Force Prevails?
Unfortunately, it is impossible to estimate. Undoubtedly, in bull markets, as the futures contract annualized premium (basis) exceeds 8%, sellers are more inclined to place neutral arbitrage trades.
CME publishes weekly exposure data for each investor’s classifications: dealer, asset, leveraged, and others. The issue with this distinction is that banks, for example, can trade on behalf of clients.
Similarly, there is no way of knowing whether funds and leveraged positions are directional or neutral arbitrage trades.
Is Leverage Harmful to Bitcoin?
No. Some analysts claim that liquidations, when the exchange sells a buyer’s position (long) by an insufficient margin, are the root of Bitcoin’s sharp drops. However, they forget that when those contracts were bought, they also boosted the price rally.
Keep in mind that not every futures contract trader is seeking to increase exposure. As explained above, arbitrage and hedge operations present neutral exposure to the price. In those examples, the investor is indifferent to the Bitcoin price.