The U.S. Securities and Exchange Commission has, so far, refused to approve any Bitcoin exchange-traded funds (ETFs) that would allow cryptocurrency to be added as a basket of securities that trade on an exchange, just like a stock. However, bitcoin derivatives are allowed and it is one way institutions can invest in cryptocurrency. In just a year it has become an institutional favorite in the U.S. for those wanting to trade cryptocurrency using traditional financial instruments.
In a derivatives marketplace, individuals, businesses and institutions are able to lock in a future price by putting it into a binding contract. These products are called futures and options – they are contractual agreements to buy or sell an amount of something (in this case bitcoins) at a fixed price at a future date.
Futures are a standardized contract for the purchase and sale of financial instruments or physical commodities on a futures exchange for future delivery. Similarly, Bitcoin futures are financial derivative contracts that oblige the holder to buy (or sell) bitcoin at a predefined price and a specific date in the future. Bitcoin futures contracts may be settled in cash or bitcoin and provide investors with the opportunity to “bet” on the price movement of bitcoin using leverage. Bitcoin futures are popular investment vehicles for speculators most notably because investors who want to “go short” an asset (betting that the price of bitcoin will decrease) can sell futures to do so. Bitcoin futures can be traded on the Chicago Mercantile Exchange (CME) or on crypto derivatives trading platforms, such as BitMEX, Deribit, or Quedex.
Options are contracts that gives the bearer the right, but not the obligation, to buy or sell a futures contract at a specified price within a specified time period. Options are, therefore, an excellent way to bet on a bitcoin rally in the near future with only a small amount of available capital.
Recent Bitcoin Derivatives Events
With no major news Bitcoin saw a price increase to $8,500 USD on January 13th. The catalyst was the influx of institutional money from both FTX Derivatives Exchange and CME Group options which both started trading. CME Group reported that on the product’s first day of public trading, 55 contracts were traded. Each futures contract is equal to 5 BTC, so at current prices, the 55 contracts were worth $2.34 million.
FTX bitcoin options began trading two days before CME Group. According to live company data, FTX saw reported volumes of 3,618 BTC on Jan. 13th. The FTX platform began its services in 2019 and is ranked as the eighth largest exchange derivatives platform. FTX offers services involving different digital assets, along with over-the-counter (OTC) offerings as well and now bitcoin options.
CME Group and FTX join Bakkt in the bitcoin options space. Bakkt is a physically settled Bitcoin futures platform. On the same day as CME Groups debut Bakkt’s futures traded 2,907 contracts worth $19.94 million USD.
By comparison the global market for derivatives is enormous, estimated at over $500 trillion, so the trading occurring with bitcoin is minuscule by comparison. Despite its small size the U.S. Bitcoin futures scene has potential to further act as a catalyst for additional institutional adoption of cryptocurrencies.
The addition of more futures and options trading of cryptocurrency shows the ongoing adoption and increasing comfort level by the financial sector for this new digital asset class. With CME Group and FTX Exchange adding bitcoin futures and options it may induce other platforms to begin similar offerings for their customers. Having larger institutions entering the crypto market lends credibility to cryptocurrency overall. The growth of bitcoin derivatives followed by other cryptocurrencies derivatives may help bring bitcoin mainstream for everyday financial dealings.
Maybe the advent of other bitcoin digital derivative products is closer than we think, along with the approval of the first cryptocurrency ETF.