The price of a single real Bitcoin coin fluctuates in the open cryptocurrency market, known as spot BTC, based on a myriad of factors such as volume, usage and dependence. However, other stimuli affect the origin of a roundabout. The cash settlement of Bitcoin futures trading products with the Chicago Mercantile Exchange is a highly quoted indirect component that contributes to Bitcoin (BTC) price development.

“The Bitcoin derivatives offered by the Chicago Mercantile Exchange are simply a way for accredited investors to place complex, risky deals that would not otherwise be available to them,” Sean Dexter, Quantum Economics’ decentralized financial analyst, told Cointelegraph. October 8. “This results in a short-term and long-term effect on the price.”

Trade bitcoin contracts CME in its most basic form
At the height of Bitcoin’s biggest bullish move on December 17, 2017, CME launched cash-settled Bitcoin futures. However, cash-settled futures contracts do not actually assume spot BTC. It simply allows traders to bet on the future price of Bitcoin without using the underlying asset.

For example, suppose the spot rate for Bitcoin is $ 10,000 per bitcoin at the beginning of the month and $ 11,000 at the end of that month. Buying a CME Bitcoin futures contract (equivalent to the price of five Bitcoins) when the price of BTC is $ 10,000 and keeping it until the expiration date at the end of the month, means that the trader will have $ 55,000 cash at the end of the month, not the bitcoins themselves .

Since trading does not involve the actual sale or purchase of bitcoins, there is a reason why these futures products should not affect the spot bitcoin price. According to Dexter, these futures contracts actually affect the Bitcoin price:

In the short term, any price effect from a large purchase in the futures market will quickly be eliminated in the spot market, which will lead to price convergence. But it can also happen if a large purchase is first made in the spot market. ”
Sometimes bitcoins are traded at different prices on different exchanges, depending on events, demand in the order book and other factors. If there is a large enough variance in price, a trader can buy BTC at a lower price on one exchange and sell it at a higher price on another exchange. This activity is called arbitration.

The price of CME bitcoin futures is likely to increase significantly if someone buys a large number of CME bitcoin futures. This does not affect the spot bitcoin price, although impatient traders can then buy or sell spot bitcoins at a lower price as an arbitrage opportunity, according to Dexter, when the spot price increases. This concept works for a number of scenarios between CME and Spot BTC.

Dexter explained that CME’s Bitcoin futures trading products have a greater impact on the spot Bitcoin price over a broader time horizon, adding that “CME products can improve price stability and reduce risk. This is optimistic for Bitcoin, as it allows large investors to come into the market without hesitation. This increases. “Liquidity and stability.” In essence, CME BTC futures add money to the market from the major traders and other participants, and also allow them to secure their trades.

Explanation of the regulator
According to Heath Tarbert, head of the US Commodity Futures Trading Commission, derivatives trading markets can affect spot markets. Derivative financial instruments include futures trading products. “Sometimes the price of cattle is actually set in derivatives markets,” Tarbert told interviewer Anthony Pompigliano on October 7 in the segment during the blockchain summit in Los Angeles. Cattle and Bitcoin are both commodities. “People say, ‘Well, the futures contract for cattle says it has to be x the amount per head, so that’s the price it’s supposed to be in the real market,” Tarbert added.

However, some commodity futures contracts have actually been settled, including the transfer of the underlying asset at maturity, which is different from bitcoin futures trading products on CME. Including similar results, investment firm Wilshire Phoenix released a comprehensive CME BTC futures report on October 14, 2020, concluding that “CME Bitcoin futures are more price dependent than the associated spot markets.”

Source: CoinTelegraph