During its meteoric ascent, bitcoin has developed a reputation for volatility, but the futures on the high-flying cryptocurrency being planned by some exchange operators could limit some of wild swings associated with bitcoin.
Last week, bitcoin surged to another record after CME Group Inc., the world’s largest exchange owner, said it plans to launch bitcoin futures before the end of this year. CME’s launch of bitcoin futures in the fourth quarter of 2017 will be pending all relevant regulatory review periods.
The new contract will be cash-settled, based on the CME CF Bitcoin Reference Rate (BRR) which serves as a once-a-day reference rate of the U.S. dollar price of bitcoin. Bitcoin futures will be listed on and subject to the rules of CME.
“CME will implement special price fluctuation limits at 7 percent and 13 percent above or below the prior settlement price, and prevent trading outside the 20 percent range,” reports CNBC. “The trading ranges are similar to what is allowed for U.S. stock index futures. But the limits could be more relevant for the notoriously volatile digital currency and could ease investor concerns about investing in the bitcoin product.”
CME Group and Crypto Facilities Ltd. also publish the CME CF Bitcoin Real Time Index (BRTI) to provide price transparency to the spot bitcoin market. The BRTI combines global demand to buy and sell bitcoin into a consolidated order book and reflects the fair, instantaneous U.S. dollar price of bitcoin in a spot price. The BRTI is published in real time and is suitable for marking portfolios, executing intra-day bitcoin transactions and risk management.
Related: Plans Revealed for a Blockchain ETF
Cboe Global markets, an exchange operator competing with CME Group to introduce bitcoin futures, recently announced its intent to offer contracts based on Gemini bitcoin market data by the end of this year or early next year, but the exchange is still waiting on approval from the U.S. Commodity Futures Trading Commission, reports Brian Louis for Bloomberg.
Derivatives help increase liquidity and improve markets for an asset category by allowing investors to bet on ups and downs of an asset, evening allowing individuals to adopt market-neutral strategies. They are also a key component in the creation of many futures-backed ETFs utilized by a range of investors.
“Other details now available on CME’s website about the bitcoin futures contract include the months for the initial listing: December 2017, January 2018, February 2018 and March 2018. Contracts expire at 4 p.m. London time, typically 11 a.m. ET, on the last Friday of the contract month, according to CNBC.
For more information on the cryptocurrency, visit our Bitcoin category.