Introduction 

Over the last four years, Bitcoin futures have become an essential part of the cryptocurrency market. They have helped with price discovery, created optionality around participation, and enabled a different set of actors to engage. 

As the price of bitcoin has increased, however, it has created a barrier to entry for some enthusiastic participants. To address this, CME Group is launching a new Micro Bitcoin Futures product. This product organizes futures around 1/10th of a Bitcoin and is designed to create even more capacity for the widest possible array of investors to participate in the markets. 

This document is meant to provide some basic information about Bitcoin micro futures trading and how it differs from other types of crypto investing. 

Getting Started 

Unlike buying and selling physical cryptocurrencies such as Bitcoin or Ether on venues such as Coinbase which requires opening an account directly with the exchange, trading futures on CME Group requires customers to open an account with a futures Broker that is licensed to execute futures trades.  A list of brokers that offer clients the access to trade Micro Bitcoin futures at CME Group can be found here.  

After selecting a broker, the next step is to select the futures contract month you wish to trade. Futures differ from trading cash cryptocurrencies in that futures represent a contract that one enters into to buy or sell a commodity or financial instrument at some point in the future.  Therefore, futures contracts have what is known as an “Expiration Date” on which, in the case of Micro Bitcoin, the futures contract will settle in a cash transaction and the trader will no longer hold a position.  CME Group will list Micro Bitcoin futures that expire each month, but most of the trading takes place in the nearest expiring month.  

Suppose Trader A purchased one contract of the April Bitcoin future at the time this screenshot was taken and paid near the midpoint of the Bid/Offer of 59,680.  The trader in our example believes the price of Bitcoin will rise and decides to hold the contract until it expires on April 30th at 11:00 AM Eastern Time.  At this time, CME Group will publish the settlement price which is an index price that takes into account the price of Bitcoin on several major exchanges (the “CF CME Bitcoin Reference Rate”).  Let’s assume that the price of Bitcoin has risen and the settlement price is 60,000. This increase would be reflected in the trader’s account in the form of a profit of 320 points. In the standard futures contract (which represents 5 Bitcoins), this increase would be a profit of $1,600; in the Micro Bitcoin futures contract (which is 1/10 of a Bitcoin), it would represent a profit, in dollars, of $32. As of 11:00 AM Eastern Time on April 30th, the trader would no longer have a position in the Bitcoin futures market. Keep in mind, while some futures contracts are “deliverable”, which means that, at expiration, a holder of a long position will take possession of the commodity or financial product, Bitcoin futures are a “cash settled” product so there is never a transfer of physical Bitcoin involved.

So, What if I Want to Stay Long Bitcoin?

A common transaction that occurs in all futures markets (and is executed by large institutions and individual traders alike) is called a “futures roll”.  This transaction simply involves selling (buying) the futures month that you’ve bought (sold) and buying (selling) the next futures month in the expiration cycle.  

In our example, if our trader desired to maintain their long Bitcoin futures position into May, they would simply sell the April contract and buy the May contract as the contract approached the expiration date of April 30th (CME Group has tools and resources that help traders determine when most of the “roll” activity takes place).  CME Group has market makers that quote this spread, allowing traders to execute it in a single, efficient transaction.  The result of this transaction would be that the trader would no longer have a position in the April contract but would be long in the May contract.  

Why is the price of Bitcoin on Coinbase less than the futures price?

One of the nice things about futures trading is that it comes with inherent capital efficiencies or, leverage.  In other words, in order to hold a futures contract, one is required to only put up a fraction of the amount of money that the futures contract represents.  In the case of the standard Bitcoin futures contract, the current requirement is that traders that hold a contract must post about 35% of the notional value of the Bitcoin futures contracts they hold, however clearing firms may as for a greater amount.

Because traders are only required to put up capital equal to a fraction of the notional value of Bitcoin futures contracts they are actually holding, there is a financing rate that is built into the price of a futures contract (you can think of this as a loan).  In industry parlance, this is referred to the “implied financing” of a futures contract.  Naturally, as the time to expiration increases, this price difference becomes greater (as you can see in the image on the prior page).  Similarly, it makes sense that the price of the futures and the physical Bitcoin converge as we approach expiration, as we observe in our markets.  As a related aside, this difference is also caused by things like storage costs and delivery fees in products like WTI Crude Oil and Gold futures, but for the scope of this paper, we’ll keep our explanation limited to Bitcoin futures which are not physically settled contracts.  

How much Bitcoin exposure do I get if I trade Micro Bitcoin futures?

Because each Micro Bitcoin futures represents 1/10 of one Bitcoin, if you trade a single futures contract, you will essentially be holding exposure equal to 10% of the current value of physical Bitcoin.  So, if Bitcoin were worth $60,000 per coin, you would be synthetically long or short $6,000 worth of physical Bitcoin.  Similarly, if the price of Bitcoin were to rise by $100, your profit would be 10% of that or, $10.  

What if I believe the price of Bitcoin is going to Decline?

Another basic tenet of futures trading is that if a trader desires to “go short” a given market, they do not incur borrow fees nor “locate” requirements.  If one wants to short Bitcoin futures, the trader can simply sell the contract in their desired contract month (again, the most liquid month tends to be the nearest expiry) and post the required margin as discussed above.

What if I don’t trade on margin because I don’t want to take a loan from my broker?

Margin on a futures contract, as opposed to, for example, a margin account in equities, is not a loan from your broker, but rather a performance bond that you must post.  As opposed to a margin loan, you are not charged interest on the margin you post to hold a futures contract and you will receive credits or debits in your account at the end of each day, depending on whether the market moved in your favor or not.  

I like to trade Bitcoin at night.  Can I trade Micro Bitcoin futures after hours?

Micro Bitcoin futures, as with most CME Group futures, are available for trading nearly 24 hours a day.  However, as opposed to some physical cryptocurrency exchanges, CME Group markets are closed between Friday evening and Sunday evening.  

Conclusion

Cryptocurrencies such as Bitcoin have become an essential asset class in the global economy, a fact that is underscored by the increasing number of companies that are investing in cryptocurrencies, accepting cryptocurrencies as payment for goods and services, or enabling the public to invest in cryptocurrencies.  CME Group’s Micro Bitcoin futures contract, at 1/10 of one Bitcoin, removes significant barriers to entry for cryptocurrency derivatives for many individuals around the globe.  Micro Bitcoin futures represent a brand new way that a broad population of individual investors can gain safe, efficient access to this new asset class.