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The price of one actual
Bitcoin on the open crypto market, known as spot BTC, fluctuates based
on a countless number of factors, such as trading volume, usage and
adoption. However, other catalysts affect the asset in a roundabout
manner. Cash-settled Bitcoin futures trading products from the Chicago
Mercantile Exchange stand as one arguable highly referenced indirect
element contributing to Bitcoin’s (BTC) price direction.

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“The
Bitcoin derivative products offered by CME are simply a vehicle for
accredited investors to place sophisticated and risk-offsetting trades
that would otherwise be inaccessible to them,” Shawn Dexter, a
decentralized finance analyst at Quantum Economics — a markets analysis
firm — told Cointelegraph on Oct. 8. “This leads to both, short-term and
long-term impact on price.”

CME Bitcoin futures trading at its simplest

At the height of Bitcoin’s largest bull run to date, the CME launched cash-settled Bitcoin futures trading,
on Dec. 17, 2017. Cash-settled futures, however, involve no actual spot
BTC. They simply let traders bet on the future price of Bitcoin without
utilizing the underlying asset.

For example, let’s say Bitcoin’s
spot price sits at $10,000 per BTC at the beginning of a month and ends
that month at $11,000. Buying one CME Bitcoin futures contract
(equivalent to the price of five Bitcoin) when BTC’s price is at $10,000
and holding through expiration at the end of the month means the trader
will receive $55,000 in cash at the end of the month, not actual
Bitcoin.

Since trades involve no actual Bitcoin sales or
purchases, these futures products logically may not seem like they
should impact Bitcoin’s spot price. In reality, however, these futures
do weigh on Bitcoin’s price, according to Dexter:

“In the
short term, any price impact caused by a hefty purchase in the futures
market will be quickly arbitraged away in the spot market, causing
prices to converge. But this could just as well happen if the hefty
purchase were to occur in the spot market first.”

At
times, Bitcoin trades at varying prices on different exchanges based on
events, order book demand and other factors. If a large enough price
discrepancy exists, a trader might buy BTC for a lower price on one
exchange and sell it at a higher price on a different exchange. This
activity is called arbitrage.

Bitcoin’s price on CME futures
would likely rise noticeably if someone bought a large number of Bitcoin
futures contracts on CME. This does not directly move Bitcoin’s spot
price, although eager traders would then go buy or sell spot Bitcoin at a
cheaper price as an arbitrage opportunity, driving up the spot price in
tandem, according to Dexter. This concept works for a number of
scenarios between CME and spot BTC.

On a larger time horizon, the
CME’s Bitcoin futures trading products affect Bitcoin’s spot price more
significantly, Dexter explained, adding: “The CME products allow for
increased price stability and decreased risk. This is bullish for
Bitcoin since it allows larger investors to get involved in the market
with less hesitation. Thus increasing liquidity and stability.”
Essentially, CME’s BTC futures add money to the market from large
mainstream traders and other participants while also allowing them to
hedge their trades.

An explanation from a regulator

Derivatives
trading markets for commodities can affect their respective underlying
spot markets, according to Heath Tarbert, chairman of the United States
Commodity Futures Trading Commission. Derivatives include futures
trading products. “Sometimes, the price of cattle is actually set in the
derivatives markets,” Tarbert told
interviewer Anthony Pompliano on Oct. 7 as part of a segment during the
LA Blockchain Summit. Cattle and Bitcoin are both considered
commodities. Tarbert added: “People say, ‘Well the futures contract on
cattle says it should be x amount per head, and, therefore, this is what
the price should be in the real market.’”

Some commodity futures
are physically settled, however, involving the transfer of the
underlying asset after expiration, thus, differing from CME’s Bitcoin
futures trading products. Including similar findings, investment firm Wilshire Phoenix released a lengthy report
on the CME BTC futures topic on Oct. 14, 2020, citing the conclusion:
“CME Bitcoin Futures contribute more to price discovery than its related
spot markets.”

What about the CME gaps?

The crypto space gives significant weight to CME gaps.
A gap occurs on the CME Bitcoin futures chart when Bitcoin’s spot price
moves while the CME Bitcoin futures markets are closed for the weekend
or the holidays. If CME’s Bitcoin futures open for trading after a big
move from Bitcoin, a gap is left on the chart between the listed price
when the CME closed and the price of BTC when it opens.

The crypto space often expects
Bitcoin’s price to return to such levels, “filling” any gaps on the
chart. “Price does not need to trade in both directions through a gap to
be considered filled,” Dexter explained. “A gap is considered filled as
long as it meets the previously traded price before the gap.”

Trading
is largely about probabilities. Probability favors gaps fills,
according to Dexter, although he added, “It is important to note that
gaps don’t necessarily have to be filled,” as gaps exist in the same
category as other chart patterns:

“The previously traded
price on CME prior to any gap could be construed as Bitcoin’s fair
market price. Furthermore, depending on the type of gap, market
participants are likely to open and/or close positions at the previously
traded price, hence causing the gap fill.”

Contrary to
the market’s sentiment favoring gap fills, however, Melvis Langyintuo, a
client solutions strategist at OKCoin, told Cointelegraph on Oct. 6
that CME Bitcoin gap fills are unlikely due to the CME’s lack of Bitcoin
futures trading volume in comparison to crypto-native derivatives
exchanges.

In the last 30 days, the CME’s Bitcoin futures have
yielded roughly $433 million in average daily volume, according to
Langyintuo. In contrast, popular crypto derivatives exchange BitMEX
often hosts over $1 billion in 24-hour trading volume. Over the last
24-hours, BitMEX’s Bitcoin perpetual swap futures product has hosted
almost $1.4 billion in volume, based on numbers posted
on the exchange. Several other high-volume crypto-native derivatives
exchanges also exist, and these exchanges trade throughout the weekend
while the CME Bitcoin futures do not, which adds to the equation.

“This
makes the CME gap non-consequential compared to the BTC potentially
filling the gap,” Langyintuo said. “The CME BTC prices are either
trailing the BTC price moves or they are a bet on where the CME BTC
market may reopen on Monday,” he added. “Trading CME futures into the
weekend is akin to essentially placing a weekend ‘put’ or ‘call’ on gap
to capture that spread,” he explained, referencing a similarity to Bitcoin options trading — another type of derivative seen on the CME and in the crypto space. Langyintuo concluded:

“For
price to fill the gap, there would need to be a lot of volume on both
the bids and offer side of the futures contract before the weekend, and
on Sunday, once the market resumes trading, the same levels of volumes
would need to be maintained in order to normalize the gap in a smooth
fashion.”

A vast number of forces
impact Bitcoin. A conclusion can be difficult when it comes to how much
impact any specific driver has, although in this case, it seems as
though the CME’s Bitcoin futures may affect Bitcoin’s spot price on a
number of levels. 

source link: https://cointelegraph.com/news/closing-the-gap-the-effect-of-cme-bitcoin-futures-on-bitcoin-price