The value of all futures contracts is determined by the underlying securities. Bitcoin futures prices are determined by the spot price of the currency. This is the current market price for buying or selling Bitcoin with immediate delivery. Any change in the latter has an impact on the former. Because of this link, the prices of the two move in lockstep, despite the fact that there is a gap between them.
Do Bitcoin futures have an impact on the price?
The futures market has recently become a popular issue, although it can only have so much influence on bitcoin’s price. The futures market has recently become a popular issue, although it can only have so much influence on bitcoin’s price.
What impact do Bitcoin futures have?
Bitcoin futures allow investors to participate in the Bitcoin (BTCUSD) market without owning the underlying cryptocurrency. They function similarly to a commodities or stock index futures contract in that they allow investors to speculate on the cryptocurrency’s future price.
What impact do futures contracts have on price?
Futures contracts are used by buyers of food, energy, and metals to set the price of the commodity they are purchasing. As a result, their risk of price increases is reduced. Futures are used by sellers of certain commodities to ensure that they will receive the agreed-upon price. They eliminate the possibility of a price decline.
Are Bitcoin futures beneficial or harmful?
The monthly average negative yield for bitcoin futures is higher than the average contango cost for crude oil futures, which is 1.69 percent each month, and only slightly lower than the monthly average negative yield for unleaded gas, which is 2.85 percent. It’s a lot higher than the average monthly contango costs on gold futures, which are 0.23 percent.
How do futures effect the cryptocurrency market?
We show that Futures trading drove up the price of Bitcoin shortly following the announcement day, using an event-study technique and an adjusted asset pricing model. Following the introduction of futures contracts, this reaction began to wane noticeably.
In 2025, how much will Bitcoin be worth?
The over 93 percent gain in value since 2022 indicates that, if the upward trend continues, BTC will be able to achieve the forecasted price of $126,127 by the end of 2025.
What causes CME gaps?
- Although the bitcoin futures trading products offered by CME do not trade in actual bitcoin, they do have an impact on the open market price.
- Although institutional investors are the primary users of cash-settled futures, ordinary investors can trade the “CME gap.”
- If the price of BTC on exchanges is greater than the CME closing price from the previous Friday, the price of BTC will normally fall to match the CME price. BTC’s price is likely to rise if the price is lower than the previous Friday’s CME close.
- Funds that just held bitcoin for the long term, on the other hand, outperformed funds that engaged in discretionary longing and shorting tactics in the past. As a result, investors who prefer to store bitcoin rather than trade the CME Gap should not feel left out.
- In the past, trading the CME gap has worked better in down and sideways market patterns than in bull ones.
The Chicago Mercantile Exchange is a stock exchange in Chicago, Illinois. Bitcoin Futures Markets provide an opportunity to timing the market by taking advantage of contract expirations, which occur at the end of each month. The price of bitcoin has had a strong link with these expirations during the last year. The Chicago Mercantile Exchange (CME) is the subject of this investigation, which examines how traders employ financial instruments such as futures contracts and shorting to boost their return on investment.
Brief Introduction to the CME
In late 2017, the CME, the world’s largest financial derivatives market, began trading BTC futures contracts. The futures market is essentially an auction where participants buy and sell commodity contracts for delivery at a later date. These contracts are exchange-traded derivatives that guarantee the transfer of a commodity in the future at a pre-determined price. Most commodities trade on a global scale, but bitcoin provides a one-of-a-kind circumstance. That is, bitcoin trading does not come to a halt or start at any given time. It trades 24 hours a day, 7 days a week, and isn’t bound by central time zones or exchanges…at least in principle.
Crypto BitBoy and other YouTubers frequently refer to the “CME gap,” but what does does it mean? The CME, unlike Bitcoin, does not trade 24 hours a day. The gap is the difference between the closing and opening trading prices of a CME bitcoin futures contract on Friday and Sunday. There are no trades between Friday’s closing session and Sunday’s starting period, resulting in the gap. The gap can also exist while the CME is closed for the holidays.
It’s vital to keep in mind that the gap does not have to be totally filled. From 2020 to early 2021, there are CME vacancies in the $8,000 to $24,000 range that are likely to remain fulfilled.
The last trade of the week on the CME futures market occurs at 5:45 p.m. Eastern Standard Time (EST) on Friday (or 10:45 PM London). Weekends are a great illustration of the CME gap. When the CME closes on Friday, the spot price of Bitcoin on open exchanges like Coinbase or Uniswap may be higher or lower than the spot price of Bitcoin on open exchanges like Coinbase or Uniswap. CME trading hours resume on Sunday at 6:00 p.m. EST (11:00 PM London). If the price of BTC on exchanges is greater than the CME closing price from the previous Friday, the price of BTC will normally fall to match the CME price. BTC’s price is likely to rise if the price is lower than the previous Friday’s CME close. Although it is less likely, a pattern has emerged during the last four years. It is easier to lower a commodity’s price than it is to raise it, because a rise typically requires higher trade volume to sway other market participants.
Consensus Effect: What Worked Before May Not Work Again
Every month, CME futures contracts expire on the last Friday. There has long been a claim in crypto that up to two days before these expirations, the price of BTC drops and then returns to increasing momentum. This trend does not always hold, which is most likely due to a phenomenon in macroeconomic markets known as the consensus effect. As more market participants become aware of a trend, the impact of the cause diminishes as traders try to outrun each other in the days leading up to the event. As a result, the market anticipates one reaction but gets the opposite.
For example, if the price of bitcoin increased on weekends and decreased on Monday mornings for four weeks, the market would notice this pattern and a trader would buy Bitcoin before the weekend and sell Bitcoin on Sunday. Another dealer, on the other hand, predicts that all other traders will buy on Thursday and sell on Saturday. And so on, until the pattern is no longer visible. This does not rule out the possibility of the market returning to a bear market “The consensus effect, on the other hand, means that the majority of market players would have to refrain from trading that pattern in order for it to persist. It is easy for retailers to have short memories and for institutions to be too quick to fall into their old finance and asset trading mindsets in crypto, maybe more than any other market, causing the consensus impact to be just as fickle and changeable as digital asset prices.
November 2020, February, March, April, May, June, July, August, and September 2021 demonstrate a trend of decreasing on or soon before the expiration date and rebounding shortly after, as shown in Figure 2. As the graph indicates, this isn’t always the case.
With the consensus phenomenon in mind, one technique is to take advantage of the statistical possibility that BTC expiration dates indicate a decline in the overall price of BTC shortly prior to a CME bitcoin expiration and that the price is likely to rebound afterward. When market moves are sideways, as they were from May to July of 2021, this is more likely to be a winning approach. The old adage “The phrase “the trend is your friend till the end” applies to all asset classes, but especially to price-discovery assets like bitcoin. In a downward going bear market, this can have fatal consequences because the tool used to try to profit from the broader trend is shorting, which has its own set of hazards. With an asset that is subject to price discovery, market acceptance, and macroeconomic influences like as monetary inflation, interest rates, and government laws, “The “end” component of the ancient adage mentioned earlier can occur at any time. Longing for a higher price in the future leaves one with the underlying asset but no other duty but to tie up funds and wait for prices to at least return to the levels at which they were purchased.
According to a PwC analysis on hedge funds, family offices, and high-net-worth individuals’ cryptocurrency trading methods, just keeping bitcoin for the long run beat more intricate strategies. The strategies were divided into four categories in the report: quantitative, discretionary long-only, discretionary long/short, and multi-strategy. The only-for-the-long-term technique of “During bull runs, “hodling” bitcoin outperformed other strategies (2019 and 2020). Not to mention the taxes that come with exchanging bitcoins frequently. As a result, investors who prefer to keep bitcoin rather than trade the CME Gap should not feel as if they are missing out.
Four Basic Strategies for Trading the CME Gap
There are ways to play the CME gap or contract expirations under the right market conditions without investing directly in CME futures contracts. The first two deal with the underlying asset directly. The last two are more complicated, but they’re still based on the same market information.
The first involves directly purchasing the underlying asset and longing the position. This entails buying the asset at a lower dollar price and selling it when the price rises. Buying the dip right before a contract expiration and selling it once the price rises in reference to our CME price. One of the advantages of this technique is that it relies solely on the investor spotting the drop and buying it while it lasts, rather than speculating on when it will occur. The CME expirations are predictable, so any investor who pays attention in the 48 hours leading up to the expiration can enter a position and exit if the price rises. The worst-case scenario is that the investor is forced to hold the underlying asset for longer than desired if the price does not recover.
The second type is “shorting,” which entails taking a position before the price drops. Someone who owns the underlying asset sells a certain amount of BTC at a higher price and waits for the CME to dip. The investor then buys back in with the same amount of money that they sold their original investment for, resulting in more BTC than they had before. In the worst-case scenario, the investor will have to reinvest with less BTC than they had before if the price rises.
Third, a trader can trade their position using leveraged or margin trading on a variety of exchange platforms. The trader is putting up collateral in order to borrow money in order to buy a greater stake in bitcoin at the current price, which they will then sell for a profit if the price rises. If the price falls, they can liquidate their collateral (leaving them with a zero balance on their position).
Fourth, trade on leverage using the exchange platform, but this time to short. This entails borrowing bitcoin at the present price, selling them, and then returning the borrowed bitcoin at a later date, with the assumption that the price would fall. Shorting bitcoin on margin can be advantageous since it eliminates the need to sell your own BTC and allows the trader to profit from a drop in the price of bitcoin. Several exchanges, including as Bybit, Prime XBT, Phemex, and FTX, can assist a trader in engaging in longing and shorting with leverage.