Closing the Gap: The Effect of GCE’s Bitcoin Futures on Bitcoin Price

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Although WEC’s Bitcoin futures trading products do not deal with the actual Bitcoin, they indirectly affect the free market price.

The price of a real Bitcoin in the open crypt market, known as BTC spot, fluctuates based on a number of factors, such as trading volume, usage and adoption. However, other catalysts affect the asset indirectly. The Chicago Mercantile Exchange’s cash-settled BitQT futures trading products are a highly referenced indirect element that contributes to the direction of Bitcoin (BTC) prices.

„The Bitcoin derivatives products offered by CME are simply a vehicle for reputable investors to make sophisticated, risk-compensation trades that would otherwise be inaccessible to them,“ Shawn Dexter, a decentralized finance analyst at Quantum Economics – a market analysis company – told Cointelegraph on October 8. „This leads to an impact on price in both the short and long term.
CME’s Bitcoin futures trading at its simplest

At the height of Bitcoin’s biggest rally to date, the CME launched the Bitcoin cash-settled futures trade on December 17, 2017. Cash-settled futures, however, do not involve any cash BTCs. They simply allow traders to bet on the Bitcoin future price without using the underlying asset.

Five cryptoexchanges hold 10% of the entire Bitcoin supply

For example, let’s say the Bitcoin spot price is $10,000 per BTC at the beginning of the month and ends that month at $11,000. Buying a Bitcoin CME futures contract (equivalent to the price of five Bitcoins) when the BTC price is $10,000 and holding it until the end of the month means the trader will receive $55,000 in cash at the end of the month, not the actual Bitcoin.

Since trading doesn’t involve actual sales or purchases of Bitcoin, these futures products may logically seem like they shouldn’t impact the Bitcoin spot price. In reality, however, these futures do influence the price of Bitcoin, according to Dexter:

„In the short term, any impact on the price caused by a major purchase in the futures market will quickly be arbitrated in the spot market, causing prices to converge. But this could also happen if the major purchase occurs in the spot market first.

Sometimes Bitcoin trading is done at variable prices on different exchanges based on events, order book demand and other factors. If there’s a large enough price discrepancy, a trader could buy BTC at a lower price on one exchange and sell it at a higher price on another. This activity is called arbitrage.

The Bitcoin price on CME futures would probably increase significantly if someone bought a large number of Bitcoin futures contracts on CME. This doesn’t directly move the Bitcoin spot price, although eager traders would then go buy or sell Bitcoin spot 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 WEC and the Bitcoin spot price.

Over a longer time horizon, Bitcoin’s CME futures trading products affect the Bitcoin spot price more significantly, Dexter explained, adding, „CME products allow for greater price stability and decreased risk. This is bullish for Bitcoin because it allows large investors to engage in the market with less hesitation. This increases liquidity and stability“. Essentially, GCE’s BTC futures add money to the market for large traders and other participants, while allowing them to hedge their trades.

An explanation from a regulator

Commodity derivatives trading markets can affect their respective underlying spot markets, according to Heath Tarbert, chairman of the U.S. Commodity Futures Trading Commission. Derivatives include futures trading products. „Sometimes the price of livestock is actually fixed in the derivatives markets,“ Tarbert told interviewer Anthony Pompliano on October 7 as part of a segment of the LA Blockchain Summit. Both livestock and Bitcoin are considered commodities. Tarbert added, „People say, ‚Well the livestock futures contract says it should be x quantity per head, and therefore this is the price that it should be in the real market.

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