We just got a glimpse of how bitcoin futures will work
- CME Group will launch bitcoin futures in the fourth quarter.
- Bitcoin will trade in $25 ticks and have a daily range of no more than 20% above or below the prior settlement price.
CME Group, one of the largest exchange groups in the world, announced last week it will roll out a bitcoin futures contract in the fourth quarter.
The announcement has generated a lot of buzz on Wall Street, and sparked a big rally in the cryptocurrency. Bitcoin climbed from $6,100 on October 30 (the day before the announcement) to more than $7,000 on November 7.
Futures, which allow two parties to exchange an asset at a specified price at an agreed upon date in the future, have been around since the late 19th century. In some cases, when a futures contract settles the buyer of the contract can receive their payment in the product itself (a barrel of oil, say), or in cash. The latter are referred to as cash settled futures. CME's bitcoin futures will settle in cash. (You can read a full explainer on bitcoin futures here.)
As futures get ready for trading, CME this week sent out a note setting out how the bitcoin futures will work. Here's what you need to know:
- Each contract is composed of five bitcoin.
- Each tick (the minimum fluctuation) will be $5 per bitcoin, amounting to $25 per contract. This means that every time the contract moves by the smallest increment a trader will gain or lose $25 per contract they hold.
- Bitcoin futures will trade on CME Globex and CME ClearPort from 5 p.m. to 4 p.m. CT Sunday to Friday. The long trading hours are typical of futures contracts that are traded electronically.
- There is a spot position limit of 1,000 contracts. Futures contracts always have limits on the number of contracts one person or entity owns. This prevents someone from being able to "corner the market."
- Bitcoin futures will have a price limit of 20% above or below the prior settlement price.
- Price settlement will be based on the Bitcoin Reference Rate, or a daily reference rate of the US dollar price of one bitcoin as of 4:00 p.m. London time.
Get the latest Bitcoin price here.>>