The information in the report appears to confirm what many in the industry already believed to be true.
A new report from investment firm Wilshire Phoenix claims that the Chicago Mercantile Exchange’s, or CME’s, cash-settled Bitcoin futures trading products affect Bitcoin’s price even though they do not directly involve actual real Bitcoin (BTC).
“The findings of Wilshire Phoenix indicate that CME Bitcoin Futures contribute more to price discovery than its related spot markets,” said an Oct. 14 report from Wilshire Phoenix, adding:
“A leading futures market suggests the existence of a robust base of traders who may trade on such markets for many reasons such as trust in the exchange venue and lower latency.”
Price discovery essentially refers to how each actual Bitcoin is valued on the market — its going market rate, or spot price. Wilshire’s report essentially found that these CME products affect the price of BTC more than the actual BTC itself, which trades on crypto-native exchanges.
Launched in December 2017, CME’s Bitcoin futures do not handle spot Bitcoin. Participants trade contracts tracking the price of Bitcoin on the crypto markets, paying out those contracts into U.S. dollars at expiration. These contracts pay out based on a price index called the CME CF BRR, which comprises a price for BTC based on values seen across a number of spot crypto exchanges, called constituent exchanges. The CME’s futures products have yielded notable interest in the years since their launch.
Even though the CME’s Bitcoin futures deal only in cash, crypto traders and participants pay attention to their price action — particularly chart gaps frequently referred to as “CME gaps”.
These gaps are made when spot BTC opens the next trading day above or below the close of the previous day, based on spot BTC’s 24-hour trading schedule, as compared with the CME’s set hours of operation for the products. Bitcoin’s spot price has been known to travel back to any gaps left on the price chart.
One aspect highlighted in the report is that the CME trades more total volume than any single spot exchange included in its CF BRR, the report detailed, adding: “which also facilitates price discovery within the futures market.” Additionally, CME Bitcoin futures participants trade notably bigger positions on average:
“A relative number of small trades in a given market is typically statistically insignificant for price discovery purposes. The average trade size on the CME futures market facilitates its lead in price discovery versus the Constituent Exchanges.”
The report also noted the presence of other mainstream futures markets affecting spot prices across other asset classes, so the findings are not out of the ordinary.
“There are 85 institutions holding open positions in Bitcoin futures, this represents a similar number versus other CME futures in major currency markets such as the Swiss Franc, US Dollar Index, and Fed Funds,” Wilshire Phoenix partner and report co-author Alexander Chang told Cointelegraph.