Bitcoin futures are 50 times more accessible to TradeStation Securities clients this week, thanks to CME’s new Micro futures contracts.
CME, the world’s biggest derivatives exchange, launched Micro Bitcoin futures last night. The new products will control just 1/10 of a Bitcoin — versus five coins for the existing Bitcoin futures contracts. Traders will be able to take positions with lower margin requirements.
Bitcoin has already tripled this year, fueled by widening acceptance by traditional institutions. It’s also benefited from scarcity value at a time of rising prices and low interest rates. That’s helped push Bitcoin’s capitalization above $1 trillion, into the same elite club as Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL) and Amazon.com (AMZN).
Bitcoin’s skyrocketing value has increased the margin requirement CME’s existing futures contracts past $100,000, making them accessible to a smaller community of traders. The new Micro contracts will lower the bar and make it easier for ordinary investors to scale in and out of the world’s biggest cryptocurrency.
What Are Bitcoin Futures?
Futures are derivatives that track an underlying asset like crude oil, gold or Bitcoin. Investors need to have an initial amount of cash as a “margin requirement” to take a position. They can go “long,” or buy, if they expect prices to rise. They can go “short,” or sell, if they anticipate a drop.
Bitcoin futures are cash-settled. That means investors holding positions at expiration (on the last Friday of each month) get paid a credit or charged a debit based on the value of their position. Traders wishing to remain long or short can roll their contracts to a future month before expiration.
CME’s new Micro Bitcoin futures follows the launch of other Micro contracts in May 2019. Those contracts track major stock indexes like the S&P 500, the Nasdaq-100, the Dow Jones Industrial Average and the Russell 2000.
The new Micro Bitcoin futures will have the symbol root “MBT,” while the standard Bitcoin futures use “BTC.” Both are followed by the expiration month code and year.
Why Trade Futures?
There are several reasons why traders use futures.
One is predictable pricing. Markets use a bid/ask spread. You pay the “ask” (which is higher) when you buy and receive the “bid” (which is lower) when you sell. Market makers stay in business by keeping the difference.
Futures always have the same bid/ask spreads, as specified by CME. Bitcoin futures have a $25 bid/ask spread ($5 per coin on 5 coins). The new Micro Bitcoin futures have a $0.50 bid/ask spread ($5 per coin on 0.10 coin). Bid/ask spreads may be less predictable or less favorable on cryptocurrency exchanges using the spot market.
Futures may have potential tax benefits under the so-called 60/40 rule. These don’t apply to short-term trading in stocks, options or spot crypto market.
Futures trade from 6pm ET on Sunday until 5pm Friday afternoon, with breaks 5-6pm each day.
Bitcoin futures make it easier to go short, or position for price declines. This is often difficult in the spot market.
Finally, Micro Bitcoin futures could help investors manage risk. They can control as little as 1/10 the notion value of Bitcoin per contract. This can let them scale in and out of positions and also hedge against drops in the spot market. They can even be used in so-called “cash and carry” trades.
In conclusion, cryptocurrencies keep evolving and gaining acceptance. CME’s new Micro futures make it easier to trade around movements in the largest digital currency. Hopefully this article helps you understand some of the key points.