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CME Futures and Bitcoin

The Chicago Mercantile Exchange & Chicago Board of Trade (CME) is an American financial market company operating an options and futures exchange. Futures are a contract wherein to parties agree to buy and sell something at a pre-set point in the future at a particular price.  The way this works is that I might agree to sell someone 1 BTC at £6000 on 30th July because I believe that the price will go down then and so I’d be getting a better rate than the market. However, the buyer may believe that the price will skyrocket to £10,000 by then and so they’d be getting a much more preferable rate than the market, thus making it a most lucrative trade when sold at the £10,000 mark. The way Futures exchanges work is that instead of receiving an actual Bitcoin, you just receive the cash difference at the end of the contract.

CME announced that it would be initiating futures trading on 17th December 2017. Shorting occurred during the initial trading of futures and the value of BTC fell significantly of 18th December 2017. Since then CME futures has had an impact on the price of BTC as essentially parties, sometimes institutional investors, contract on the value of BTC at a pre-set point in the future and profit / incur losses based on the accuracy of their predictions. What emerges is the significance of understanding the positions of institutional investors in cryptocurrencies and the relationship between the futures trading and the value of cryptocurrencies therein.

 

To demonstrate the significance of this, imagine that an entity with a large amount of Bitcoin decides to short Bitcoin on CME through a futures contract. They then transfer to an exchange and a USD tether (supposedly to the real USD as on Bitfinex) is pumped significantly. Whales flood the market with Bitcoin which were previously not circulating in the supply and suddenly the value of BTC is lowered significantly. Once the consequences of the dump halt, they re-purchase the artificially deflated BTC for a much cheaper price than at which they dumped, allowing them to amass much greater amounts of BTC than before. This increases their leverage and they don’t even necessarily have to liquidate BTC as they can just use the artificially created and manipulated USD Tether to buy anything on the market.

 

Aside from one potential strategy of hedging some BTC in USDT and the other half in trades, and cashing our right before the next CME Futures contract is up, NouVive has developed a strategy for analysing market charts to make informed investment decisions, as explained below with the help of a chart.

 

What tends to happen with CME Futures contract is that when CME launches a new BTC Futures contract, the price at that point is a localised top and falls precipitously following the launch, as seen between 17th and 18th December in 2017 and on 28th February in the chart below. The CME Bitcoin Futures contract expires on March 29th and presents itself as a localised bottom as seen in the chart. This makes shorting profitable for those partaking in such contracts and could be either the result of market manipulation by whales as above or general market pressures rendering futures contracts profitable for some at the expense of others.

 

On 3rd April, there is another futures contract launch date. The price is still at a localised bottom. From this point, the price skyrockets once again, as seen in the chart. On 27th April, there is another CME Futures contract expiration as reflected by the localised top! On May 25th, there is yet another localised bottom as the CME Bitcoin Futures contract expires. From this point, the price starts rising again as seen on 28th May, which is interestingly also the day that the WSJ report of CME Futures came out.

The above analysis demonstrates firstly that prices tend to fall once they reach localised tops and rise when they reach localised bottoms. Prices fall from the localised top present when CME launches a new BTC Futures contract. As the futures contract reaches expiry, BTC prices tend to dip and present a localised bottom. Thence, the price of BTC skyrockets when a new futures contract is launched. As the contract nears expiry, prices dip and close off at a localised bottom. As a new futures contract is launched, the price of BTC rises again.

 

It is worth bearing in mind that any entity is limited to owning a maximum of 1000 contracts containing 5 BTC each. Essentially, every 5 USD move in BTC is a 25 USD profit or loss on a contract. Generally, prices tend to dip significantly immediately prior to contract expiry (normally 1 – 2 days). A 9000 USD price dip as seen at the end of last year could represent a potential $45M profit per entity maximising the contracts and BTC / contract they hold. While multiple entities could band together to benefit from such astronomical profits, as analysis of the USD Tether earlier highlighted. Analysis of the depth chart in GDAX demonstrates that one would need approximately 15M USD to buy all the BTC within 1000 USD of market price. A group of entities / whales, could band together to spend the 15M USD each to lower the price of BTC by 1000 USD. This would net each whale in the group 50M USD total, representing a 35M USD net profit. Thus, there is a major incentive for whales to hold short positions on CME Bitcoin Futures contracts and then artificially drive down the price by flooding the markets to win big on their futures contracts. Traders would instantly pick up BTC trades on the lower prices and so the group of whales would need to continually do this to keep prices down otherwise prices will rebound back. One important factor, readers should remember is that the total bitcoin in play in a futures contract at lower amounts (e.g. 85M USD worth) could mean that manipulation costs by whales could significantly cut into their profits and also indicate that groups of whales have not formed. In such cases, a dip might no occur and short positions on the dip might fail.

 

Ultimately, readers need to be aware of several factors when looking to gain a return on their investment on long and short positions taken on the price of BTC. The dates of futures contracts play a major role in price changes of BTC however other factors must be analysed to test whether the principles expounded above apply in each particular case to accurately predict the price changes in BTC so as to ensure a profit and not a loss.

 

Regularly check in with WeViveLive to build knowledge on market fundamentals and market signals to gain a competitive edge in cryptocurrency trading to make each trade an informed and profitable venture.  

 

Nouvive: Home of Crypto Beginners, Traders & Investors. Nouvive provides Cryptocurrency trading news, Analysis and indicators for beginners, traders and investors.

Information on these pages contain speculative statements that involves risks and uncertainties. Crypto-Assets profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell. Nouvive does not in any way guarantee that this information is free from mistakes, errors or material misstatements. It does also not guarantee that this information is of a timely nature. Crypto-Assets involve risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing or trading are your responsibility alone. For more information, please view the Risk Warning Below.

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