- 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.
What is the Bitcoin CME futures difference?
The difference between the trading price of Bitcoin futures contracts when the market begins on Sunday and when it ends on Friday is known as the Bitcoin CME gap. Traditional assets, unlike cryptocurrency, do not trade 24 hours a day, seven days a week.
Why are gaps in CME filled?
Proponents of Bitcoin are having a field day in the market. For the first time since October 21, the digital asset broke through the $64,000 resistance level. The level had previously been challenged on November 2nd, but there had been no market close above the range.
Bitcoin was stabilising near $66,000 at the time of publication, although the breakout occurred before the start of the new week. Another speculative correction has resulted as a result of this. (It’s been a long time, CME gaps!)
Bitcoin CME gap occurs What was it in the 1st place?
When the price of Bitcoin starts above or below the previous day’s close on the CME exchange, a CME gap is generated. The fact that CME markets are closed over the weekend and for part of the day is one of the primary causes of CME gaps. Bitcoin is traded 24 hours a day, seven days a week on other spot exchanges.
Due to institutional participation in CME, however, these gaps are frequently filled under the premise that the spot price of Bitcoin would eventually return to the CME closing price. Now that we’ve all caught up on the CME gap, let’s take a look at Bitcoin’s current chart.
When does the CME gap occur?
CME ClearPort: 6:00 p.m. Sunday to 6:45 p.m. Friday ET (5:00 p.m. to 5:45 p.m. CT), with a 15-minute maintenance window Monday through Thursday between 6:45 p.m. and 7:00 p.m. ET (5:45 p.m. to 6:00 p.m. CT).
Do CME voids usually close?
Even though gaps almost always close, trading them is a losing strategy. Taking the data a step further, the analyst discovered that more than half of the Bitcoin CME futures gaps were filled on the first day of the new trading session, with the remaining 30% filled later in the week.
What is the CME Bitcoin exchange?
The CME Bitcoin futures contract, ticker symbol BTC, is a USD cash-settled product based on the CME CF Bitcoin Reference Rate (BRR), which acts as a daily reference rate for the price of bitcoin in US dollars.
What does CME stand for in the crypto world?
The Chicago Mercantile Exchange (CME) offers cash settlement monthly contracts. 1 When a contract is settled, an investor receives cash rather than actual delivery of bitcoin. On December 1, the Cboe Options Exchange launched the first bitcoin futures contract.
What is the full name of the CME gap?
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When the market opens with a gap, what happens?
Gaps appear as a result of underlying fundamental or technical issues. If a company’s profits are significantly higher than expected, the stock may gap up the next day. This indicates that the stock price opened higher than it ended the previous day, resulting in a gap. It is not uncommon for a report to generate so much interest in the forex market that the bid and ask spreads widen to the point where a substantial gap can be visible. Similarly, a stock that makes a new high in the current session may gap up higher in the following session for technical reasons.
What will bitcoin’s price be in 2022?
Predictions for the Year 2022 In the year 2022, Bitcoin was valued at $46,657.53. Given the stability of key trading conditions, many expect Bitcoin will reach $50,000 before the end of the year, according to the price projection.