Bitcoin Futures Explained

On Dec 9, 2017 CBOE got into the bitcoin world by opening up a market on Bitcoin Futures. CME also plans to get into the cryptocurrency world by also offering futures on Bitcoins. There are a handful of subtle differences between these contracts. As an exercise to better understand the market I've detailed the contract specs from CBOE and CME.

CBOE

Description - The futures are cash-settled contracts that are based on the Gemini auction price for bitcoin in USD.
Ticker Symbol - XBT
Contract Multiplier - 1 (i.e. one XBT future is 1 bitcoin)
Trading Hours - 5pm Sunday - 3:15pm Monday // 3:30pm - 3:15pm weekdays (CST)
Minimum Price Intervals (Ticks) - 10.00 points (equivalent to $10 per contract)

CME

Description - The futures are cash-settled contracts that are based on the Bitcoin Reference Rate (BRR).
Ticker Symbol - BTC
Contract Multiplier - 5 (i.e. one XBT future is 5 bitcoin)
Trading Hours - 5pm - 4pm (CST)
Minimum Price Intervals (Ticks) - 25.00 points ($5 per bitcoin)

Differences

There are a handful of small differences (and one big one) that we should make note of if we plan on trading these. Let's take a look at the small differences.

Small Differences

First, the trading hours are slightly different which means during certain hours, we won't be able to trade CBOE but can trade CME futures. If you were trading the CBOE/CME bitcoin future spread, its something to keep in mind of.

CME contracts are five times the price of the CBOE contracts. But we see that CME contracts have smaller tick sizes (per bitcoin) at $5 per bitcoin compared to the $10 per bitcoin for the CBOE contracts.

The Big Difference

The biggest difference I see is that the underlying bitcoin "price" is different between CBOE and CME.

CBOE futures use the Gemini auction exchange price.

Gemini-Horizontal-Dark

CME futures use CME's Crypto Facilities' (CF) Bitcoin Reference Rate (BRR) and Bitcoin Real Time Index (BRTI). The methodologies can be found here and here, respectively.

infographic-cme-cf-brr-and-brti-459x293

The BRR aggregates the trade flow of major bitcoin spot exchanges during a specific calculation window into a once-a-day reference rate of the U.S. dollar price of bitcoin. Calculation rules are geared toward a maximum of transparency and real-time replicability in underlying spot markets.

The BRTI aggregates global demand to buy and sell bitcoin into a consolidated order book and reflects the fair, instantaneous U.S. dollar price of bitcoin. It is geared toward low latency and timeliness and is based entirely on forward-looking input data.

I haven't looked at the details on how Gemini or BRR/BRTI are calculated but there's definitely money to be made here. Further, if you find the relationship between the two indices there could be some great spread trading that could be had. Finally, when CBOE and CME release options based on these futures, you can expect companies to devote teams to trade the complex like they do currently with SPY/SPX/SPU trades.

Other Thoughts

With CME and CBOE setting up future contracts, we should see an injection of volume as large financial institutions now have an easy way to get into bitcoin.

More interesting to me, before future contracts, there was no easy way to short the bitcoin. That is, you couldn't sell it unless you bought a lot of it to begin with. With future contracts, however, since its an agreement to buy/sell at a future date (in this case, its not even that case since its just cash settlement) you could sell something you don't own (I'll write a post later on to explore this idea in depth). That is to say, we could be seeing a lot of selling pressure come into play as CBOE and CME bitcoin futures become more popular.