CME Brings Bitcoin into Mainstream with Futures Launch

The contracts, which will launch on the Chicago Mercantile Exchange (CME) in the fourth quarter of 2017, pending regulatory approvals, will be cash settled and will reference the CME Crypto Facilities (CF) Bitcoin Reference Rate.

The benchmark, which was launched by the CME and CF in November 2016, had been cited as a major step forward in legitimizing bitcoin. The reference rate aggregates the price of bitcoin among the major digital currency exchanges and publishes a price at 4pm London time. The two firms also publish a real-time index for spot pricing.

Terry Duffy, chairman of CME Group, said in a statement that the introduction of the contract was in part due to “client interest in the cryptocurrency markets.”

Bitcoin has taken the world by storm, in large part due to its wild volatility and the potential for early investors to make huge gains. A year ago, the price of one bitcoin was $729.27. After the announcement by the CME on October 31, the price rose to $6,330 for a single coin, marking an all-time high. However, digital currencies have yet to take hold among professional trading firms.

One of the reasons for this has been the lack of a developed derivatives market for the products, which cannot be properly hedged as a result. However, together with the launch of the CME’s futures—which comes hot on the heels of regulatory approvals for the LedgerX clearinghouse and swap execution facility, the first regulated market to offer bitcoin options, this may be beginning to change.

Other firms are also exploring how regulated vehicles for bitcoin could encourage institutional participation in bitcoin trading. The Chicago Board Options Exchange, for instance, through its acquisition of Bats Global Markets, is currently attempting to list exchange-traded funds based on bitcoin—and has successfully challenged a ruling from the Securities and Exchange Commission that prohibited their listing, which is now being reviewed by the agency.

XBT Provider, owned by St. Helier, Jersey-based asset manager Global Advisors, is also listing cryptocurrency exchange-traded notes on Nasdaq.

“On top of [a nascent derivatives market], as with us, you’re starting to see a number of hedge funds, you’re seeing vehicles like XBT Provider that are lessening the friction of getting exposure to this space, and that’s very bullish for the ecosystem,” says Ryan Radloff, head of investor relations at Global Advisors.

Derivatives are not the only issue holding back further development of bitcoin as an investable commodity, or in digital currencies becoming a bona fide asset class. There are also distinct gaps in market structure, such as prime brokerage functions, and problems with existing structures that require addressing. For instance, exchanges often fulfill multiple roles as venues, custodians and sometimes brokers, while many do not have security functions in place that are commonly seen in traditional asset classes, such as price bands or circuit breakers.

This has been highlighted by a series of “flash crashes” in popular digital currencies this year, including ether, which crashed from more than $300 on June 21 on the GDAX exchange to 10 cents within 45 milliseconds, only to regain most of its value instantly, a price move that still wiped out most traders transacting on margin. GDAX refunded the costs in that instance and pledged to explore how circuit breakers could improve market quality.

“There are new types of risks that market-makers, authorized participants and broker-dealers need to get comfortable with before they go in, and that will happen, but slowly and surely,” says Global Advisors’ Radloff.