CME Bitcoin Futures Drive Price Over $20,000

CME Group launched it bitcoin futures contract Sunday evening, opening at $20,650. The contract, designated BTC, follows by one week the introduction of CBOE’s futures contract, XBT.

BTC futures are quoted in U.S. dollars and the contract unit is 5 bitcoin. Trades settle at 5:00 p.m. ET, and the front month contract closes on the last Friday of the contract month.

CME traded 221 contracts in the first hour after opening compared to 527 trades at CBOE’s debut. But with a 5-bitcoin contract, each CME trade is equivalent to five CBOE trades.

Because the CME contract is traded on four exchanges volume is much higher and the price is more robust. Futures trading in the bitcoin market is expected to help investors hedge their risks and to provide a price curve that will smooth out some of the big swings in bitcoin prices.

The exchanges also open the door to institutional investors previously unable to invest in bitcoin because they are forbidden from holding an unregulated asset in their portfolios. A futures contract is something tangible and has the added advantage of not forcing these big investors to hold the physical asset. That eliminates custody issues and reduces counterparty risk.

Neither CME nor CBOE is taking a big chance on a sudden drop in bitcoin prices. Neither are banks and brokers. The Chicago Tribune reported that Goldman Sachs is demanding that some clients collateralize their purchases with a 100% margin requirement. Interactive Brokers Group requires a 50% margin on long contracts and around 240% on shorts.

The huge margin on shorts reflects the fact that there is no limit to how much an investor can lose. A word to the wise.

The BTC January futures contract traded at $19,255 per bitcoin early Monday morning, while the XBT January contract traded at $19,220.