The crypto market is one of the fastest-growing niches in today’s financial markets - it is currently over $1.8 trillion in market capitalization with around 6,000 coins in existence. More crypto financial products that range from lending and borrowing services to cryptocurrency derivatives have also come up. Bitcoin futures are among the leading crypto products with an open interest (total number of outstanding derivative contracts that are yet to be settled) of $20.23 billion as of press time.
So, what’s the history behind the growth of the Bitcoin futures market? Let’s first define what they are and how they work. Bitcoin futures are derivative instruments whose value is determined by the underlying asset, in this case, BTC. They allow traders to take positions without buying Bitcoin itself - instead, they can buy a derivative contract whose value is affected by Bitcoin’s price movement. In doing so, a trader can get exposure to Bitcoin without owning the digital asset.
Notably, Bitcoin futures are settled at a later date based on a predetermined price and the prevailing market prices - a trader can be long (buy) or short (sell). Think of it as placing a bet on Bitcoin’s future price, where you would want to buy it cheaper in future or sell it at a higher price, should the prevailing market prices be lower than your predetermined BTC price. You can learn more about how this works in our crypto derivatives introduction article. Meanwhile, let’s jump into how the Bitcoin futures market has been evolving and some of the highlights over the years.
Like most financial products, Bitcoin futures started with humble beginnings to become a powerhouse in the crypto market. The first regulated Bitcoin futures were launched towards the end of 2017 by the Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange (Cboe) - however, these derivative instruments were already being traded on some crypto exchanges without regulation.
The launch of Bitcoin futures in 2017 was widely welcomed by both retail and institutional investors who had primarily relied on spot trading to make gains. With Bitcoin futures in the picture, these stakeholders could now short the market (bet that BTCs price will go down). The Cboe website crashed on the same day that Bitcoin futures made a debut - at the time, the 2017 bull market was at its peak with Bitcoin testing the $20,000 mark.
It was not long before the prices tumbled, marking the onset of the three-year bear market or, as it is popularly referred to, ‘crypto winter’. A Wall Street Journal (WSJ) analysis in January 2018 noted that the launch of Bitcoin futures had partly contributed to the bearish trend. According to the report, Bitcoin futures provided an opportunity for big players to short the market, which ultimately led to the collapse in prices.
While CME and Cboe dominated the regulated Bitcoin futures market in 2018, Intercontinental Exchange (ICE) which owns the New York Stock Exchange (NYSE), announced the launch of its own BTC futures through Bakkt - a BTC custodial service. This Bitcoin future launched in September 2019 and was the first to introduce a physically settled crypto derivative instrument. In other words, the Bakkt Bitcoin futures gives traders an option to settle their positions in Bitcoin instead of cash.
Fast forward to 2021, the Bitcoin futures market is one of the most liquid niches in the crypto ecosystem. Institutional investors are now jumping into the Bitcoin bandwagon - the world’s largest fund manager, BlackRock, recently filed with the SEC declaring that it held 37 Bitcoin futures contracts which expired in Q1, 2021. These positions were worth $6.15 million and realized $360,458 as per the filing.
There have also been other developments which include an upcoming micro-futures trading desk by the CME. This leading derivatives exchange announced in March 2021 that it will be launching a Bitcoin micro-futures product to serve the growing demand for crypto derivatives. The product set to launch in Q2, 2021, will be a cash-settled futures contract representing a tenth of a Bitcoin. Should the launch be successful, CME will expand its Bitcoins futures clientele and boost the overall crypto derivatives market liquidity.
Besides the fundamental progress, Bitcoin futures are now a big part of predicting the crypto market trend. Open interest is a crucial metric that crypto analysts use to predict the short and long term future of Bitcoin. This metric recently broke an all-time high (ATH) when Coinbase was listed in the Nasdaq exchange - Bitcoin futures open interest soared past $27 billion, although it later retracted when the hype died down.
It is also noteworthy that the emergence of crypto derivatives exchanges such as Drixx makes it easier to get exposure to this market. Furthermore, traders can maximize opportunities by using leverage - on Drixx; this can go up to 100X. Old timer spot crypto exchanges like Binance, OKEx and Huobi also offer Bitcoin futures amongst other crypto derivative products. However, regulatory hurdles are still a challenge in some jurisdictions, such as the United States, where only regulated Bitcoin futures can be traded.
The approval of Bitcoin futures by the U.S Commodities Futures Trading Commission (CFTC) was a giant leap for the crypto market in 2017. Stakeholders became optimistic that regulators will approve Bitcoin Exchange Traded Funds (ETFs) as well. You can think of ETFs as investment funds that track the price of an underlying asset such as gold, basket of stocks, an index or crypto asset like Bitcoin. ETFs can be traded on stock exchanges, making them a flexible market instrument and a perfect tool for bringing Bitcoin to the mainstream market.
So far, a couple of Bitcoin ETFs have been approved, with the latest developments being in Canada. The country has been on an approval spree after accepting the first Bitcoin ETF to launch in the Toronto Stock Exchange (TSE) - the Purpose Bitcoin ETF debuted in February 2021 as its pioneer kind in North America. Since then, Canada’s financial watchdog has approved a series of Bitcoin ETFs and is now giving the green light to Ether ETFs as well. Meanwhile, the U.S Securities Exchange Commission (SEC) continues to reject Bitcoin ETF applications, citing possible market manipulation as one of the main reasons.
Bitcoin futures have attracted a significant amount of liquidity into the crypto market since they debuted in regulated exchanges. These crypto derivatives scaled opportunities for traders looking to build advanced risk management and hedging strategies. Similarly, they have triggered massive liquidations in recent months, especially for over-leveraged traders. That said, the upside seems to be more fundamental as they are setting the stage for other products such as ETFs. It will be interesting to keep a close watch on the developments that define the crypto derivatives market in 2021.