CME Group Bitcoin Futures – Derivatives Bitcoin Reference Rate?

Bitcoin surged today as the owner of the world’s largest exchange announced plans to introduce bitcoin futures before the end of 2017.

The news comes just one month after CME Group Inc. dismissed similar bitcoin-related reports. Bloomberg reported that “the allure of bitcoin was too much” for the exchange group, which operates the world’s largest options and futures exchange.

What Is The CME Group?

CME Group has been described as “the biggest financial exchange you have never heard of.” The Chicago-headquartered organization owns the Dow Jones stock and financial indices as well as CME Clearing Services, which provides settlement and clearing of exchange trades. The organization was formed in 2007 when the Chicago Mercantile Exchange (CME) merged with the Chicago Board of Trade (CBOT).

This is a big deal for bitcoin.

Just one month ago, CME Group dismissed plans to add bitcoin futures to their exchange platform. Now, in just a few short weeks, the organization has reversed its stance.

Bitcoin reached record highs on the news, trading above $6400 for the first time in its history.

CME Group isn’t wasting any time implementing bitcoin futures trading. The company plans to implement bitcoin futures trading before the end of 2017.

The organization’s decision was likely spurred by a competitor. Cboe Global Markets Inc., located just across the street from CME group in Chicago, announced plans earlier this year to launch a bitcoin futures contract by late 2017 or early 2018. Cboe is awaiting approval from the Commodity Futures Trading Commission.

How Will the CME Bitcoin Futures Contract Work?

CME’s bitcoin futures contract will settle in cash and use a daily price from the CME CF Bitcoin Reference Rate. CME collects its data based on the price of bitcoin from exchanges like GDAX, Bitstamp, itBit, and Kraken.

Notably, CME will not use Gemini for its reference rate. Gemini, one of the world’s other largest cryptocurrency exchanges, has already struck a deal with Cboe.

Why This is a Huge Deal for Bitcoin

CME Group may not be a household name. However, the organization is legitimately the world’s largest futures and derivatives exchange. It’s a major organization with enormous sway over the global financial industry, to say the least.

By creating a functioning derivatives market, CME Group can help professional traders and investors access the volatility of bitcoin without having to trade on unfamiliar exchanges. Investors can get exposure to bitcoin without the downsides.

Traders can also hedge their cash positions in bitcoin – something that has been difficult to do so far.

“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,” Terrence Duffy, CME’s chief executive officer, said in a statement today.

This will ultimately open the doors to institutional investors. Today, there are relatively few institutional investors that provide exposure to bitcoin.

In fact, Bitcoin Investment Trust, which is one of the few investment vehicles for exposure to bitcoin, is currently trading at a 30% premium above the net asset value of the fund. It’s a physical fund that holds bitcoin – and yet traders are still willing to pay a premium.

“The amount of institutional money in bitcoin now is very little because there are very few vehicles,” Bogart said. “If there are bitcoin futures, there can be futures-based” exchange-traded funds.

Ultimately, this makes it easier to create an exchange-traded fund (ETF) based on bitcoin. It’s important to note that CME Group isn’t the first company to offer bitcoin derivatives: both CME and Cboe lost to startup LedgerX, which won CFTC approval to offer bitcoin swaps and options and began trading earlier this month.

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