Many have asserted that the first time Bitcoin futures were launched, a planned market crash followed. The exchange that launched those futures back in late 2017 is gearing up for more institutional products in two months’ time so what impact will that have this time around?
CME Options Launch In January
The Chicago Mercantile Exchange is expanding its institutional Bitcoin product lineup. According to a press release one of the world’s leading derivatives market places announced that, pending regulatory approval, options on its BTC futures contracts will be available for trading starting January 13, 2020 – just two months from today.
— Su Zhu (@zhusu) November 12, 2019
CME Group Global Head of Equity Index and Alternative Investment Products, Tim McCourt, stated;
“Since the launch of our Bitcoin futures nearly two years ago, clients have expressed a growing interest in options as another way to hedge and trade in these markets. We have worked closely with clients and the industry to establish a robust and increasingly liquid underlying futures market here at CME Group, and we believe Bitcoin options will now offer our customers greater precision and flexibility to manage their risk.”
The Bitcoin futures market has shown strong growth since it was first introduced two years ago. The average daily volume of 6,500+ contracts in 2019 is equivalent to around 32,500 BTC. According to the release almost half of the trading volume is outside the US.
The primary difference between futures and options is that the contract holder is obligated to sell a futures contract on the expiry date. With options there is no obligation to sell the contract on expiry, giving greater flexibility which of course may impact market prices. Investopedia goes into more detail on the differences.
Impact on Bitcoin Prices
When the CME and CBOE launched Bitcoin futures contracts in December 2017, it was during the market peak. It was widely reported that the US government planned this to enable mass shorting of the asset which would burst the bubble. It was a resounding success, three months later Bitcoin had dumped 60%.
According to former CFTC chairman, Christopher Giancarlo, the Trump administration had this in mind all along;
“One of the untold stories of the past few years is that the CFTC, the Treasury, the SEC and the [National Economic Council] director at the time, Gary Cohn, believed that the launch of bitcoin futures would have the impact of popping the bitcoin bubble. And it worked.”
This time around the scene is very different, there has been no massive crypto hysteria, the crypto scene has matured and retail and institutional investment has steadily grown. Therefore there will be no huge incentive to short Bitcoin because it is not at its peak.
Options are more flexible than futures and, just as Bakkt will eventually do, it will increase liquidity for Bitcoin markets which will be bullish for long term prices.
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