Getting Ready for Bitcoin's Catalysts

The price of bitcoin, the world's largest cryptocurrency by market cap, began climbing during the week of October 23 after spending much of the summer stuck around $26,000. It recently rose above $35,000 to touch its highest level since May 2022.

This post is part of Consensus Magazine's Trading Week 2023, presented by CME.

Why is bitcoin appreciating?

Some point to signs that a slate of exchange-traded funds that hold actual bitcoin — known as spot bitcoin ETFs — may soon be approved by U.S. regulators. Such approval (if granted) will provide investors with additional products to access bitcoin exposure and may attract participants who may have been sitting on the side-lines .

The approval of the futures-based ProShares Bitcoin Strategy ETF (BITO) made history in October 2021 as one of the strongest-ever ETF launches, amassing more than $1bn in assets in just two days, and continuing to attract interest.

Another popular theory is tied to bitcoin's upcoming "halving." This pre-programmed adjustment to the blockchain cuts in half the reward miners receive for processing transactions and creating new bitcoin from the current 6.25 to 3.125 bitcoin per block. This event occurs after 210k blocks are mined or about every four years until the maximum supply (21MM) is reached. The next halving, Bitcoin’s fourth, is expected to happen by mid-April 2024.

In the past, this event and the associated supply reduction has coincided with a strong run-up in bitcoin’s price and could potentially lead to pre- and post-halving volatility. The geopolitical and macro backdrop for the upcoming halving is very different from previous ones and the availability of regulated, robust and liquid Bitcoin futures and options from CME Group means firms have trusted and tested products to hedge their bitcoin price risk or gain exposure.

Investors who trade in the futures market usually have one of two aims: to either hedge the price of an asset by locking in a future price or to speculate on the price direction of an asset to seek to profit from the ups and downs of futures prices.

CME Group Bitcoin and Micro Bitcoin and futures and options can help investors navigate cryptocurrency market risks and potentially profit from its opportunities. Micro Bitcoin futures traded volume has doubled from 5,9000 contracts in September 2023 to 11,9000 contracts traded in October 2023 while Bitcoin futures witnessed a 38% increase in daily volume to 13,300 contracts over the same period.

Cryptocurrency futures bring three main advantages for investors.

1. The contract is cash-settled in USD. There is no need to custody the coin, which removes the risk of having to safely store it. That means you don’t need to have a wallet, worry about hackings, or insurance. The futures simply track the price of bitcoin or ether, and settle in USD, so, by trading cryptocurrency futures instead of the coins themselves, investors can bypass several operational hurdles.

2. They are CFTC-regulated contracts. That means they offer several customer protections. For example, your funds are fully segregated and each trade is centrally cleared. CME Group’s clearing house becomes the buyer to every seller and the seller to every buyer. This substantially mitigates counterparty risk from the trade.

3. Futures make it easier for investors to short. No "locate" or borrow is necessary, just simply sell to gain short exposure. Bitcoin and ether are no strangers to volatility. While some investors might embrace that, others are far more risk-averse. Selling futures contracts could well play a part in their strategy. Investors who like more risk can sell (short) futures to try and profit from bitcoin or ether’s downside moves. Other investors, meanwhile, can sell (short) futures to hedge the bitcoin or ether they already own. This way, they can offset some losses if their crypto portfolio takes a dive.

Moreover futures offer investors more precision to fine tune exposure and allow them to control a large contract value with a smaller amount of capital. One Micro Bitcoin futures contract (ticker: MBT) is set to one-tenth of a bitcoin, which is 50 times smaller than a full-sized contract (ticker: BTC). One Micro Ether futures contract (ticker: MET) is one-tenth of an ether, which is 500 times smaller than its full-sized counterpart (ticker: ETH). The notional size for MBT is about $3,500 while for MET, it is about $200 (at current market prices).

If you are buying bitcoin or ether on a spot exchange, you will need to fully fund the position before you trade. An advantage with futures is that you only need to put down the initial margin requirement, or the amount of money you need as collateral to open your trade.

Institutional interest in Bitcoin futures has steadily climbed. Open interest, a measure of client demand, hit an all-time high of 20,380 contracts on October 25, equivalent to 101,900 bitcoin, representing $3.5 billion in notional value. Similarly, the number of large open interest holders (LOIH) of CME Group’s Bitcoin futures grew to a record 122 on October 24 (LOIH for Cryptocurrency futures is defined by the CFTC as an entity that holds at least 25 contracts).

This is further proof that institutional investors are warming up to bitcoin and positioning their portfolios amid renewed optimism. Retail investors, too, seem to have played their part, as evidenced by the uptick in  futures-based ETF’s AUM. The rolling five-day volume in ProShares’ industry-leading Bitcoin Strategy ETF (BITO) jumped by a staggering 420% to $340 million last week. BITO invests in CME Group Bitcoin futures.

CME Group futures are not suitable for all investors and involve the risk of loss. Full disclaimer. Copyright © 2023 CME Group Inc.