CME Group, wary of Bakkt, to roll-out Bitcoin Options in Q1 of 2020; hit or a miss?

Bitcoin is looking good in the eyes of the CME Group once again.

The CME Group, two years after releasing Bitcoin Futures contracts, is set to unveil Bitcoin Options in the first quarter of 2020. Timing being the key here, derivative contracts for cryptocurrencies seem to be a trend now.

Spurring interest earlier this month, the CME dropped hints that another Bitcoin product could hit its shelves. Speaking to market makers, the exchange began gauging interest and building strong foundations for the next set of derivatives products, building up institutional demand on the cryptocurrency front, something which has been on the rise.

Tim McCourt, the CME Group’s Global Head stated that owing to “increasing client demand and robust growth,” within this regulated Bitcoin market, the options launch will provide “additional flexibility,” within Bitcoin trading. He added,

“These new products are designed to help institutions and professional traders to manage spot market bitcoin exposure, as well as hedge Bitcoin futures positions in a regulated exchange environment.”

With cross-town rival CBOE dropping out of the BTC Futures race earlier this year, CME operated unrivalled for the better part of this year. But now, a new entrant beckons, and the latter is growing wary.

BAKKT INTO A CORNER

Bakkt, Intercontinental Exchange’s [ICE] digital assets platform, will go live with its Bitcoin Futures contracts geared for institutional clients, with the aim of stealing the derivatives market. The major sell for the ICE project is physically delivered Bitcoin contracts, as opposed to the CME’s cash-settled contracts.

The difference, from a puritan perspective, is crucial here. CME Bitcoin contracts are simply a contractual representation of 5 Bitcoins being traded between institutional clients, and not physical movement, while Bakkt has gone the extra mile of ensuring custody solutions as well, leading to actual Bitcoins being traded and spurring volume in the process.

PRICE AND COMPETITION

From April to June, Bitcoin futures volume on the CME has been surging beyond expectations, owing to two factors: price and competition. The overwhelming increase in the price of Bitcoin did not go unnoticed by Wall Street. Bitcoin, beginning on 2 April, sparked a massive bull run, taking it from $4,100 to $13,500, come the close of June. Several factors contributed to this rise; adoption, Libra, and regulatory clarity, but for the CME, the catalyst was the absence of a competitor.

The Intercontinental Exchange, during the close of last year, pinned the start of 2019 as the release period for Bakkt, which evidently did not materialize. Instead, the release date was pushed to ‘later in 2019.’ Amid much confusion, the project looked to have hit a permanent snag, much like the Bitcoin ETF. During the bullish period of Bitcoin, with the CBOE absent and Bakkt on the down low, the volume on CME rose, but not indefinitely.

VOLUME A DISTRACTION

Based on the convenient trading environment, the volume sparked. In the first week of the BTC bull run, contracts rose by 950 percent with over 22,000 contracts traded, setting a trend. In the bullish period that followed, CME contracts volume tracked the price, rising with every price increase.

Quite recently, the CME group stated that on average, 7,237 Bitcoin Futures contracts were traded per day on their exchange. However, if a more short-term time period is looked at, the figure is inflated. Since Bitcoin began its sluggish movement after peaking at over $13,500, a pennant has formed.

This pennant has dragged down the price from the aforementioned high to $10,000 and currently, the price is stuck within this level. Considering this lock-out of the Bitcoin price, the CME volume tells a very different story. From 26 July to 19 September, the number of contracts traded on the CME, on average, are hovering at 4,300, 40 percent shy of the YTD figure.

Below is a chart representing CME Bitcoin Futures volume between 19 August and 19 September,

Source: CME Group

OPTIONS MIGHT NOT BE THE OPTION

CME Bitcoin Futures was seen as the spark for the famous Bitcoin bull run back in December 2017, but now its effect has simmered. With the imminent introduction of Bakkt, with its custody solutions for physically delivered BTC derivatives, the prospect of Bitcoin Futures and Options, for that matter, on a cash-settled system looks out of touch.

Even last month’s CME Bitcoin Futures expiry, which previously impacted the spot price, did not move the market, again suggesting that it’s losing its grip.