Closing the gap: The effect of CME Bitcoin futures on Bitcoin price

Published on by Cointele | Published on

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Buying one CME Bitcoin futures contract 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.

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.

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."

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 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 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.

"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.