Everything you wanted to know about BTC futures but were afraid to ask!

[fillippone]

I must say thing evolved pretty fast.

The  crack down on "unregulated" platform, coupled wit the bull run, who attracted more actors in the Bitcoin environment, presumably "institutional inventors" apparently favourited the CME.

CME has now the second biggest Open Interest amongst Bitcoin exchanges:



The open interest is the measure of the "open positions" on the exchange, and is a more reliable metric when we want to look at "investment" positions, rather than trading positions.

If we look at the trading volumes, actually the situation is quite different:



There we see CME is still lagging behind many exchanges.

Of course, raw trading volumes cannot be considered a good indicator, as they can be faked in many ways, as many studies have demonstrated. Volumes must be coupled with other indicators if we want to assess the liquidity and the reliability of an exchange.


In the following graph we appreciate the fact that, albeit on the rise, trading volumes at CME have been tiny, when compared to OKEx.



Notice of course CME is closed on the weekends, something legacy exchanges must avoid as soon as possible to gain competitivity.

While the trading volumes have been slowly rising, the open interest has been rising steadily in the last month.



if we "zoom" on the CME we can appreciate  the growth of both metrics.




Of course it's like we have a magnifying glass: we know on the trading volumes there is still a lot to be done in my opinion.

Open Interest growth is anyway impressive in my opinion, and above all quite "unexpected". But exchange are looking for volumes to gain marketing exposure and headlines, but they look at open interest to gain a steady inflows and loyal customers, meaning revenues on the long run.
Institutional money look at depth in markets, and reliability, they might not be interested in trading volumes, if the exchange cannot provide them with a fully qualified legal framework, insurance coverage included. On these aspects CME can play at par with the other exchanges.
OF course the liquidity can be improved, and of course the anachronistic stop during the weekends must be somehow eliminated for CME to fully compete in this arena.
 

[fillippone]

In order to complete Yesterday analysis, some movement on the COT published by CME:



We see that the two most directional investor categories have started to diverge retail are at record longs, while HF's are at record short.
So one could start asking: who's right?
Well, the answer could be: both.

On CME website we can analyse some more details:



Here you can see the long and short position of each category. The most relevant is actually the leveraged funds one, with both longs and shorts position, but currently with a net negative exposure.
On the other hand categories like Asset Managers are long only, with no short position whatsoever. Of course they are probably hedging client's positions.
Another very imbalanced category is the "Not Reportable", that is probably identifiable with the retail accounts.


The graph is not exactly readable, but if you go on the website you can open detailed tables like this one:



What I mean is that provably retail accounts, and asset managers, are pure longs, hedging long positions of their clients.
Leveraged funds , on the other hand, are more difficult to read, as their rationale could be not so clear.
A short position could be initiated for a cash and carry strategy (that is a neutral strategy, aimed at capturing a positive future basis), or an arbitrage between exchanges (again a neutral strategy), or a partial coverage of a long underlying positions.
What I mean is that in these COT documents, we are probably looking at a leg only of the total exposure.

[fillippone]

On the infamous JPM report "Bitcoin’s competition with gold" there was an interesting section about the interpretation of the open interest.

First they analysied the open interested, in a similar way we made mutiple time on this thread.

Millennials and corporates endorsement of bitcoin have also induced greater interest by institutional investors as evidenced by the spike in activity across  both bitcoin futures and options at CME, and that was before Paypal’s announcement this week (Figure 4). CME bitcoin futures open interest averaged a record of 10.5K contracts per day in Q3, up 32% compared with Q2 and up 127% vs. Q3 2019. Institutional flow in particular saw strong growth, with 692 new accounts added. The number of large open interest holders averaged 79 in Q3, up 64% compared to Q3 2019.

This is pretty" standard" analyisis, and I tried digging a little bit further on the numbers like in the previous post.

Something new surfaced on the following bit.

What about the positioning backdrop? To infer positioning in bitcoin futures, we use our open interest position proxy methodology that we also apply to other futures contracts, where we look at the cumulative weekly absolute changes in the open interest multiplied by the sign of the futures price change every week. The rationale behind this position proxy is that when there is a price increase, the net long position of spec investors increases also with the magnitude of the increase determined by the absolute change in the open interest. It does not matter whether the open interest rises or falls as the net long position can increase either via fresh longs (increase in open interest) or a reduction of previous shorts (reduction in open interest). And vice versa. When there is a price decrease, the net long position of spec investors decreases also with the magnitude of the decrease determined by the absolute change in the open interest. It does not matter whether the open interest rises or falls as the net long position can decrease either via fresh shorts (increase in open interest) or reduction of previous longs (reduction in open interest).

Our position proxy for the CME futures contacts is shown in Figure 5. This position proxy spiked to a new high for the year as the bitcoin price breached $13k following Paypal’s announcement. In other words, for the near term, bitcoin looks rather overbought and vulnerable to profit taking we think. Figure 5: Our Bitcoin position proxy based on open interest in CME Bitcoin futures contracts

Well, this is an extremely interesting way to approach on the matter, and I will surely try to "replicate" it on my future analysis.

[fillippone]

CME is excellently riding this BTC run.

We can see they consistently are the second biggest exchange under the Open Interest Metric:



Binance is closing the gap, but since last update we see bigger overall values: this is a sign of bigger investor involvement in the market.

Numbers look pretty neat for CME: both volumes and open interest value in USD are going up:



Of course a large effect of these numbers going up are caused by BTCUSD going north in the first place. With higher BTC every dollar based metric is looking good, and can be used to celebrate successes (as Barry Silbert teaches us!)

On CME website we have an indication on Open Interest in BTC units:



Of course this quantity is not directly influenced by USD quotes, so using a spy of mine I was able to gather an historical graph of that:



Here we can appreciate the fact the Open Interest is going up at 11,700 contract, but back in August the absolute number of contract was higher]@15,500 with a similar USD amount.

I think this level is then important and that institutional players could fade the move in BTC in case of further appreciation, as probably this USD level  i relevant.
Keep in mind that the dollar is still the main unit of account for many of those players; MicroStrategy being the only notable exception to this.

[DrSakmii]

Blockfi Review 2020: Pros and Cons - how to get bitcoin loan https://cryptocrow.net/bitcoinloans/

[fillippone]

Bit news for the CME, that is now venturing in the retail market:



CME Group to Launch Micro Bitcoin Futures on May 3

Tue Mar 30 2021
CHICAGO, March 30, 2021 /PRNewswire/ -- CME Group, the world's leading and most diverse derivatives marketplace, today announced it will expand its suite of crypto derivatives with the introduction of a new Micro Bitcoin futures contract on May 3, pending regulatory review.
Micro Bitcoin futures will be one-tenth the size of one bitcoin. The smaller-sized contract  will provide market participants – from institutions to sophisticated, active, individual traders – with one more tool to hedge their spot bitcoin price risk or execute bitcoin trading strategies in an efficient, cost-effective way, all while retaining the features and benefits of CME Group's standard Bitcoin futures.

More detail can be found here:
https://www.cmegroup.com/trading/micro-bitcoin-futures.html

Contract Specifications*

CONTRACT SIZE. 0.10 bitcoin
TRADING HOURS   
CME Globex: Sunday - Friday 6:00 p.m. - 5:00 p.m. ET (5:00 p.m. - 4:00 p.m. CT) with a 60-minute break each day beginning at 5:00 p.m. ET (4:00 p.m. CT)

CME ClearPort: 6:00 p.m. Sunday to 6:45 p.m. Friday ET (5:00 p.m. - 5:45 p.m. CT) with a 15-minute maintenance window between 6:45 p.m. - 7:00 p.m. ET (5:45 p.m. - 6:00 p.m. CT) Monday - Thursday.

MINIMUM PRICE FLUCTUATION
Outrights: $5 per bitcoin = $0.50 per contract
Spreads: $1 per bitcoin = $0.10 per contract
PRODUCT CODE
MBT
LISTING CYCLE
Six consecutive monthly contracts inclusive of the nearest two December contracts.

So, the notional of this. future will be around 6,000 USD instead of the USD 300,000 of the standard contract.
This will help the retail adoptions of financial futures, supposedly bringing more liquidity.
Of course, it will become easier for hodlers to play the cash&carry game.

Small fishes: rejoice!

[fillippone]

A very interesting thread on Twitter, about futures, cash and caddy and contango.

Let's analyise it:

https://twitter.com/caprioleio/status/1377326629077315589?s=20

The attached image is this one:


This is the CFTC COT (Commitment of Traders). We have seen this, it's a recap of the Open Interest broke down in various macro-categories of accounts.

Well, we see that the Asset Managers are roughly flat, while "Others", a residual category, and "non Reported", meaning retail, are net-long long. The only big short category is the Hedge Funds community.

What does it mean?
Let's look at the expiry curve in the BTC futures.



This is Deribit, but every other future exchange has a similar shape.

If you remember well, this shape is called CONTANGO:




An upward shape, with longer expiries with a higher price.


One idea would be of trying to capture this premium by selling the future and buying the underlying position.
If the costs involved in this plays are below the price difference, we actually have a risk free profit.




This is exactly what hedge funds are doing in bigger and bigger sizes. An astute observer might think that those positions are meant to be held until expiry, so the short positions on the future leg, imply a long position must be matched. This is another drain in the bitcoin supply: if those coins are locked in this risk-free trade, they cannot be used to be sold or lent to be sold by those who want to sell the market (hence a quite rise in BTC funding rates)



But this is another story.

[fillippone]

Apparently, I am not the only one looking into Bitcoin futures contango.
A very good article on Bitcoin Magazine tries to explain what is a Contango, why it is present in Bitcoin futures and if it is going to stay there for long.


A DEEP DIVE INTO BITCOIN’S CONTANGO

It's quite a technical article, but even if you don't grasp all the details, it's a good way to try to understand what is happening in bitcoin markets nowadays.

Currently, the spot price (market price for bitcoin on exchanges) trades lower than futures prices. The spread for the June futures contract is more than 25 percent annualized on most major exchanges.

This means that anyone can buy bitcoin and use that bitcoin as collateral to sell the June futures contract. This trade locks in a risk-free 6 percent USD-denominated return (more than 25 percent annualized) no matter where the price of bitcoin goes over the following months.

The only risk is exchange custody (losing coins due to poor management or hacks).

Recommend read.
Also, remember I am always here to help.

[fillippone]

Finally, also Bakkt is moving away from the zero they registered during last month.
Actually, Bakkt is experiencing his record open interest:



Well, this other diagram will help to put all this in the right perspective:



While it might be unfair to compare Bakkt with some unregulated exchanges, it's worth noticing the comparison with the CME who has an OI 25 times bigger.

[fillippone]

Looks like the Bitcoin contango is the hot topic of the day.
Bitcoin Magazine publishes a good recap of a J.P. Morgan report detailing how to play the bitcoin futures curve:


JPMORGAN EYEING BITCOIN’S CONTANGO, RELEASES BULLISH REPORT

“As has often been the case in the past, the growth and gradual maturation of cryptocurrency markets have naturally generated interest in derivatives and other sources of leverage. Though futures trade against a range of pairs, Bitcoin unsurprisingly dominates this nascent marketplace. Similarly to the spot market, these products trade within a highly fragmented ecosystem, with nearly 30 active venues. The vast majority is traded offshore as well, with less than 15% of the total open interest listed on major, regulated domestic venues like the CME (Exhibit 1). Normalized depth in futures has also kept pace with the deepening of the cash market, suggesting it too is benefiting from institutional inflows and improved liquidity provision in spot (Exhibit 2).”

I guess it is pretty natural, given the abundant yield it can be extracted from the market via cash and carry operation:



I want just to add you can find the original article here:
Wall Street Reports On Bitcoin

[fillippone]

Once again, an entertaining read on contango, this time by Arthur Heyes:

ALL ABOARD!

I am an arbitrage trader at heart. In May 2013 brimming with my experience as a delta one trader, I entered the crypto capital markets. The first trade I ever put on was buying Bitcoin from Mt. Gox, depositing them on ICBIT, then selling BTC/USD June 2013 inverse futures contracts at a premium. My first trade captured a premium of 200% per annum (PA). When the futures expired, and my PNL matched my spreadsheet calculations exactly, I thought to myself, holy shit, “Bitcoin is LIT!”
This type of trade, called “Cash and Carry,” is the bedrock of the crypto capital markets. The futures implied yields on Bitcoin, USD, and other coins affects all aspects of the market. It is one the simplest and highest risk adjusted return trades one can execute. It also does not entail taking any crypto vs. fiat price risk. Remember, the primary goal of trading and investing is for your portfolio to at least match fiat M2 growth. Essentially, the “Cash and Carry” trade allows you to harvest the structural bid speculators have for crypto and its realised volatility.

The guy might be a pirate, but for sure can write entertaining articles.

[icopress]

Cool ... I don't even know how I missed this thread.
A little later, I will also share some details and perhaps formulate a couple of questions, (Simply put, from now on I am watching you).  

[1] The beginner's guide to technical analysis: https://www.babypips.com/learn/forex/elementary ^{[discuss questions of interest]}

[fillippone]

CME is proving to be the main exchange for the “institutional” cohort of bitcoin trades.
Thence they stand out a little form the crowd. They have a few characteristic that put them on a different plan from the others.
Their future basis is lower than other exchange, meaning their future is being pushed down by institutional more than other markets.
In fact,  they tend to have lower trading activity with higher OI data, as they were used to hodl positions.

This doesn’t mean they haven’t done well this last quarter:


CME Group: Q1 2021 Bitcoin Futures Revenue ‘Higher Than the Entirety of Last Year’

“If you look at our first quarter of this year, the revenue was higher than the entirety of last year, and it was about $4.7 million in the first quarter.

[oHnK]

This thread is very usefull, because a few days ago there was someone who told me that the purpose of the future is actually very good this is a tool used for hedging. Moreover, companies need exact figures regarding future transactions that are often carried out for the purposes of their financial reports and their budgeting. However, today the market for the future is being damaged by the Popes who use the future not in its place, but as speculation. I was confused at first, because I didn't really understand about the future let alone BTC in the future, and finally I found the thread that you made. It was that you wrote that the use of Future is not only for hedging but for speculation as well. So why do some of my friends think that futures are used for speculation can damage the market and they are attributing the decline in BTC prices some time yesterday because BTC futures are due. Is that true?

[fillippone]

This thread is very usefull, because a few days ago there was someone who told me that the purpose of the future is actually very good this is a tool used for hedging. Moreover, companies need exact figures regarding future transactions that are often carried out for the purposes of their financial reports and their budgeting. However, today the market for the future is being damaged by the Popes who use the future not in its place, but as speculation. I was confused at first, because I didn't really understand about the future let alone BTC in the future, and finally I found the thread that you made. It was that you wrote that the use of Future is not only for hedging but for speculation as well. So why do some of my friends think that futures are used for speculation can damage the market and they are attributing the decline in BTC prices some time yesterday because BTC futures are due. Is that true?

Futures can for sure be used for both speculation and hedging. Futures are just a tool in the hands of the investors.
If used as a speculation tool futures have the advantage of leverage.
This means that with the same amount of money speculators can control a bigger amount of BTC, hence influence the market more efficiently.
is that damage? I don't know. Speculators take their risk and put their capital at work.
I don't know if it is unfair. In the end, they can very much likely lose their capital.
 

[Wipeout2097]

I appreciate it all for such a valuable data and Usually a good finding for this reason and it'll make sense clear that nothing isn't a straightforward assignment for long haul reason inside this blockchain framework, it's truly an acknowledged assignment which has done and I moreover accept that Bakkt isn't however prepared to require the challenges to the favor of Bitcoin, one of the most issues in this stage is the cost instability so Bakkt will not competent to do something with respect to this issue, so diminishes will stay same and Bitcoin will pick up more space inside this framework.

[fillippone]

This is gold.

Contango plays on CME, how to gain from it, why it is still present:

How institutions are searching for crypto yields

Institutions entering the crypto ecosystem usually have one of the following two objectives: building an allocation to bitcoin (asset managers, treasuries) or exploiting the inefficiencies of this young market through spread trades and other strategies (hedge funds).

As a result, for a number of traditional finance institutions, entering crypto markets doesn’t mean taking a directional view on the assets but rather implementing delta neutral and risk management strategies, ultimately contributing to making this asset class more mature and efficient.

An interesting aspect of this young market is the very steep contango of the bitcoin futures curve, reflecting a structural shortage of US Dollars in crypto capital markets (historically crypto rich & cash poor).

This is a very nice article, detailing not only where is the “arbitrage” but also why it is there and what are the underlying dynamics.

[fillippone]

The days of the 20% contango at the CME are numbered:

UPDATE 1-Goldman launches cryptocurrency trading team -memo

May 7 (Reuters) - Goldman Sachs Group Inc on Friday revealed details on its cryptocurrency trading group, according to a staff memo seen by Reuters.

The trading group, whose formation Reuters reported in March, has been buying and selling bitcoin futures on CME Group and non-deliverable forwards, according to the memo.

Finally someone big enough came to the market. Soon they will start selling the future against the underlying flattening the curve.
We will see who will prevail between GS and the leveraged longs.

[fillippone]

CME launched a new version of their futures:

CME Group’s Micro Bitcoin Futures Open for Trading

“At one-tenth the size of one bitcoin, micro bitcoin futures will provide an efficient, cost-effective way for a broad array of market participants – from institutions to sophisticated, active traders – to fine-tune their bitcoin exposure and enhance their trading strategies,” Tim McCourt, head of equity index and alternative investment products at CME Group, said in a press release.

So basically, instead of controlling the usual 5 BTC, a microbitcoin future will control only a tenth of a bitcoin.
Hence the capital will decrease from 300,000 USD equivalent to 6,000 USD.
This means many more traders will be able to benefit from the liquidity, reliability and compliance of the trading venue at CME.


Link to the Official Press release:
CME Group Announces Launch of Micro Bitcoin Futures

[fillippone]

We saw that coming, but not so fast!


https://twitter.com/skewdotcom/status/1393132333465808897?s=20

Obviously, when you put in the same arena

• A few investment bank trading desks, playing the cash and carry game
• The micro-bitcoin future, lowering the capital requirement to play the cash and carry game
• A bearish price action taking out a a few leveraged buys

Of course the curve must flatten.

Detail of the above image:


From 23% to 3% in three months. This is impressive.
I am just wondering how many bitcoin were needed to do so. I think it's difficult to extrapolate this information from the publicily available data.