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CME Bitcoin Futures: A Better Way to Buy (or Short) Bitcoin?

By Dan Caplinger - Dec 10, 2017 at 8:02AM

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Find out how this competing futures product will compare to the first mover.

Bitcoin has seen immense gains so far in 2017, and prices have been extremely turbulent, hitting investors with substantial corrections even amid a general upward trend. Bitcoin futures have become the next big thing for followers of the cryptocurrency, and CME Group (CME 0.48%) is looking to become the second exchange to offer futures contracts on bitcoin, following in the footsteps of CBOE Global Markets (CBOE 3.04%). Investors want to know how the CME contract will compare to the CBOE's offerings and which one makes more sense for their needs. Below, you'll find all the facts you're looking for.

When will CME bitcoin futures first be available?

The CME is looking to launch its bitcoin futures effective Monday, Dec. 18. Trading will be available on the CME Globex electronic trading platform and for submission for clearing via the CME's ClearPort on the preceding day, Sunday, Dec. 17, starting at 6 p.m. EST.

How much bitcoin will each CME futures contract cover?

Each CME bitcoin futures contract will correspond to the value of five bitcoin. That's substantially larger than the CBOE contract, which covers a single bitcoin. The CME contract will therefore be riskier for investors but will save them in transaction costs if they would have wanted to trade in five-bitcoin increments anyway.

Bitcoin symbol in gold 3D mosaic, rising from a gray mosaic.

Image source: Getty Images.

What are the specifications for CME bitcoin futures?

The CME will have several futures contracts for bitcoin listed at any one time. Currently, the exchange expects to list monthly contracts for the two next quarterly intervals of March, June, September, or December, along with two additional months not on that quarterly cycle. So for a December release, investors can expect bitcoin futures expiring December 2017 and March 2018, as well as the January and February in between.

Like the CBOE contract, the CME's futures contracts will be cash-settled. At settlement, no actual bitcoin will be involved, and the final settlement value will be determined using the CME's bitcoin reference rate. This rate is intended to be a standardized reference rate and spot price index with independent oversight, with pricing data coming from established bitcoin exchanges, including Bitstamp, GDAX, itBit, and Kraken.

If bitcoin prices rise after you buy a futures contract, and if you then hold it until expiration, you'll end up with cash equal to the price gain per bitcoin, multiplied by five. If the price goes down, then you'll have to cover losses in a similar amount. Those who sell futures rather than buying them will see the opposite: profits if the price falls, and losses if the price rises.

What margin requirements will CME bitcoin futures have?

To trade futures, investors have to deposit an amount of money that complies with margin requirements. The CME's initial margin will be 35% for bitcoin futures, meaning that for every $50,000 in underlying bitcoin value covered by the contract, investors will have to put up $17,500 in margin.

What happens if there's a big price change in bitcoin futures?

The CME intends to impose trading limits for bitcoin futures. Intraday moves of 7%, 13%, and 20% will trigger various circuit breakers that will temporarily halt trading. Exactly how these moves will work is unclear, because unlike with stock futures that are coordinated with actual stock trading on the NYSE and Nasdaq, the CME can't order the bitcoin market itself to halt trading. What's fairly clear, though, is that moves of more than 20% won't be allowed within a single day, and lower limits of as little as 5% could apply during overnight hours when primary futures markets aren't open.

During what hours will CME bitcoin futures trade?

Trading hours for the CME bitcoin futures contract will run from 6 p.m. EST Sunday until 5 p.m. EST Friday, with a one-hour break each day from 5 p.m. to 6 p.m. EST. This will involve longer intraday breaks than the CBOE product, which has just 15-minute trading stoppages. Like the CBOE, the CME bitcoin futures contract won't trade from Friday afternoon through Sunday afternoon.

Will CME bitcoin futures be available to me to trade?

As with any futures contract, you'll need a futures account with your broker to trade CME bitcoin futures. Some stock brokers don't offer futures at all, while others that do offer futures might choose not to allow clients to trade in bitcoin. Be sure to check with your broker to find out whether they'll authorize bitcoin futures trading and whether they'll have any higher margin requirements for their customers.

How will CME bitcoin futures interact with competing products?

The most interesting aspect of the CME bitcoin futures release will be how it compares with CBOE bitcoin futures. The two products use different pricing mechanisms, and their specifications are slightly different. Nevertheless, what one would expect is that if the markets are efficient, then the two sets of bitcoin futures contracts should closely mimic each other's moves.

CME is clearly going after a different market than the CBOE with its bitcoin futures, with the five-bitcoin contract specification appealing more to large institutional investors. Bitcoin enthusiasts will want to see how both products work in assessing what impact futures will have on the future of bitcoin.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Cboe Global Markets and CME Group. The Motley Fool has a disclosure policy.

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