CME to offer Bitcoin futures

CME Group, one of the world’s most diverse derivatives marketplaces, has announced it intends to launch bitcoin futures in the fourth quarter of 2017. This is ‘pending all relevant regulatory review periods’ which means not all is assured. Bitcoin values hit US$6400 per bitcoin in intraday trading on October 31st, after this announcement.

Terry Duffy, CME Group Chairman and Chief Executive Officer said: “Given increasing client interest in the evolving cryptocurrency markets, we have decided to introduce a bitcoin futures contract. 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.

Terry Duffy, CME Group Chairman (http://investor.cmegroup.com/investor-relations/directors.cfm?bioID=7620)
Terry Duffy, CME Group Chairman

Bitcoin futures and BRR

The new contract will be cash-settled. It will have as a base the CME CF Bitcoin Reference Rate (BRR). This will serve as a once-a-day reference rate of the U.S. dollar price of bitcoin. As expected, these bitcoin futures will be listed on and subject to the rules of CME.

Since November 2016, CME Group and Crypto Facilities Ltd have calculated and published the BRR. This aggregates the trade flow of major bitcoin spot exchanges during a calculation window into a US$ price per bitcoin. This happens at 4pm London time. Designed around the IOSCO Principles for Financial Benchmarks, Bitstamp, GDAX, itBit and Kraken are the constituent exchanges which currently contribute the pricing data for calculating the BRR.

We are excited to work with CME Group on this product and see the BRR used as the settlement mechanism of this important product,” said Dr.Timo Schlaefer, CEO of Crypto Facilities. “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.

Bitcoin Real Time Index

CME Group and Crypto Facilities Ltd. also publish the CME CF Bitcoin Real Time Index (BRTI). This provides price transparency to the spot bitcoin market. The BRTI combines global demand to buy and sell bitcoin into a consolidated order book. The CME Group claims this “reflects the fair, instantaneous U.S. dollar price of bitcoin in a spot price”.

BRTI is available in real time. It focuses on:

  • marking portfolios
  • executing intra-day bitcoin transactions
  • risk management.

Cryptocurrencies

The Cryptocurrency market capitalization has grown over recent years. It now stands at more than US$170 billion. Bitcoin represents more than half of this, at about $94 billion. Perhaps more significant is that the CME Group describes the “bitcoin spot market has … grown to trade roughly $1.5 billion in notional value each day”.

What does this mean

The CME Group joins the Chicago Board Options Exchange (CBOE) which in the summer announced plans to launch bitcoin futures, as well as agreement with the Winklevoss brothers’ digital currency exchange. Bitcoin fever has truly broken out.

But consider. The CME and CBOE are reputable and regulated exchanges. At least two questions arise. The first is: are the CBOE and CME, by inference blessing cryptocurrencies, and especially bitcoins? The CME Group provides an index valuation, not a direct market itself. In effect it enables bitcoin financial ‘investing’ activity with that index.

The second question is: what is the risk? From this writer’s perspective this is as close as you can get to ‘risk cubed’. If most financial products come with some risk, then the options and futures markets at least square the risk. Add the uncertainties of bitcoin and who knows where you are on the risk league when you have bitcoin futures. This seem to be for gamblers, or the hardiest (or foolhardiest) of investors.

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Charles Brett
Charles Brett is a business/technology analyst consultant. His specialist areas include enterprise software, blockchain and enterprise mobility tech (including metering). Specific industry sectors of interest and experience include finance (especially systems supporting wholesale finance), telecommunications and energy. Charles has spoken at multiple industry conferences, has written for numerous publications (including the London Times and the Financial Times). He was the General Chair of the bi-annual High Performance Systems Workshop, 2005. In addition he is an author and novelist. His Technology books include: Making the Most of Mobility Vol I (eBook, 2012); Explaining iTunes, iPhones and iPads for Windows Users (eBook, 2011); 5 Axes of Business Application Integration (2004). His published novels, in the Corruption Series, include: The HolyPhone Confessional Crisis, Corruption’s Price: A Spanish Deceit and Virginity Despoiled. The fourth in The Corruption Series - Resurrection - has is now available. Charles has a B.A. and M.A in Modern History from the University of Oxford. He has lived or worked in Italy, Abu Dhabi, South Africa, California and New York, Spain, Israel, Estonia and Cyprus.

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