Published: May 7th, 2021
The Chicago Mercantile Exchange (CME) Group, one of the world’s biggest futures and options marketplaces, launched a new ‘micro Bitcoin’ futures product this week. Set at one-tenth of BTC’s market price, the new derivative contract aims to attract individual crypto investors who’ve been priced out of crypto derivatives by skyrocketing BTC prices.
CME’s launch will put bitcoin futures contracts within reach for retail traders, who will be able to buy in for as low as USD 6,650 (at time of writing). That’s a long from the USD 290,000 traditional Bitcoin future are being valued at.
Speaking to Reuters, CME’s head of alternative investment products said that ‘when you look at Bitcoin’s price, how rapidly it’s appreciated in a matter of months, the result has been to make future contracts prohibitively expensive.’
Futures contracts allow crypto investors to buy or sell Bitcoin at an agreed price on an agreed date in the future. For example, if a trader wanted to purchase one bitcoin at USD 56,500 in three months, that target price could be locked in using a futures contract.
That’s good for hedgers, and speculators too. Crypto futures can be bought and sold just as any market-traded asset. Bets can be made on the likely difference between the price today and the going market price in the future. For the trader who makes the best bet, the result can be significant profit.
But there are significant barriers to entry. Up until now, only institutions could afford to play the futures game. CME’s first bitcoin futures contract, for example, is valued at five Bitcoin. When it launched in 2017, five bitcoin wasn’t so pricey. Today it would require capital of around USD 289,000. A micro BTC future, by contrast, comes in at a tenth of one bitcoin, or around USD 6,250-6,500.
That’s a much more accessible range for retail traders priced out of the mainstream futures offer. Affordability is only part of the picture, however. CME says institutional investors have also expressed interest in micro futures as a vehicle to gain flexibility in their trading strategies. With options in the USD 6,000 range, they don’t have to make moves in increments of USD 290,000.
Of course, if BTC Bitcoin’s price keeps shooting upward, today’s mini Bitcoin contracts might start to look less micro over time. CME’s executives seem ready for this, saying they are already considering an offer of differently-sized contracts if Bitcoin keeps growing at the rate seen in 2021.
Earlier this year, CME launched an Ethereum futures product that generated more than 5,400 contracts in April. The company said an Ethereum futures contract valued at 50 ETH seemed like the correct scale, but since then, Ethereum’s price has almost quintupled, making an Ethereum contract worth about USD 115,000. That's small compared to a standard Bitcoin future contract, but Ethereum might need its own micro futures offer if ETH continues on the same price trajectory.
In March, CME announced it had generated USD 4.6 million in Q1 revenue from its initial Bitcoin futures offer. It hopes micro futures will grow that figure in the future.
Crypto derivatives are also being embraced by the higher end of the market, as evidenced by reports this week that Wall Street stalwart Goldman Sachs is preparing to launch a Bitcoin derivatives product of its own on the CME.
A story published by Bloomberg says the global investment giant will start offering Bitcoin futures to large investors in the form of non-deliverable forwards; e.g. short-term futures contracts that provide a cash pay-out to buyers who can predict the future price of BTC accurately.
Forwards operate like this: two parties in a trade agree to a target Bitcoin price and sign a contract. At contract expiry, the counterparty closest in their prediction of what BTC’s price will be secures a gain. The amount is defined by the difference between the actual price and the forward’s contracted price.
By setting out its stall in the crypto derivative space, Goldman hopes to turn one of Bitcoin’s negatives, volatility, into an investment opportunity. BTC’s price has whipsawed back and forth from USD 49,277 to a record high of USD 63,511 in the last 30 days alone. At the time of writing, it's sitting between those poles at just above USD 56,100.
The new offer adds to the publicly traded Bitcoin futures Goldman launched earlier this year. Now with the forwards product, it has a wider net to capture big investors like hedge funds and other Wall Street firms.
Goldman is working in coordination with Cumberland DRW, a digital asset trading specialist. Cumberland DRW, to buy and sell BTC futures on CME’s options board.
Lat quarter the Chicago Mercantile Exchange posted revenue Bitcoin futures trading of USD 4.6 million. While CME is the go-to forum for traditional investors when they want to invest in Bitcoin futures, crypto-native exchanges like BitMEX, Huobi, Binance, and Bybit own the space currently. They all post bigger trading volumes than the CME.
There are still significant regulatory barriers for traditional firms like Goldman if they want to wade into crypto markets. Goldman CEO David Solomon told analysts attending the firm’s April earnings call that the bank was watching Bitcoin developments closely but that compliance issues stopped it from making big moves quickly. ‘We have to operate inside the current regulatory lines,” he said, noting that SEC rules forbid the bank from owning Bitcoin outright or trading it as a principal asset.
Goldman’s head of digital assets told Bloomberg that Institutional demand for crypto derivatives continues to grow. ‘Working with partners like Cumberland who live and breathe crypto trading will help us position for future growth.'