Setting Bitcoin’s Price Mechanism: CME Group to Launch BTC Futures
On the anniversary of the publication of Satoshi Nakamoto’s Bitcoin white paper, the price of Bitcoin reached a new all-time high, following the news that CME Group, one of the world’s largest derivatives exchanges, will launch a Bitcoin futures product before the end of Q4 2017.
Futures or derivatives in general are understood by their relationship to risk. They are investment products that can be bought and sold in the future based on being pinned to a fixed price through a contractual agreement. Basing futures off another fixed price allows investors to avoid financial risk or assume it for profit during price fluctuations.
Like most futures, CME’s Bitcoin futures product will be cash-settled, based on the CME CF Bitcoin Reference Rate (BRR). According to CME, the BRR is a standardized reference rate, which — along with a bitcoin spot price index, the CME CF Bitcoin Real Time Index (BRTI) — “accelerat[es] the professionalization of bitcoin trading.”
Like most other financial institutions exploring cryptocurrency, CME is launching a Bitcoin futures product to both satisfy client interests and investigate the rewards of testing blockchain technology’s “transparency, price discovery and risk transfer capabilities,” as noted by Group Chairman and Chief Executive Terry Duffy.
The BRR and BRTI are two tools that have become consistent and reliable price references for bitcoin globally. The BRR has been calculated and published by CME and Crypto Facilities Ltd. since November 2016. Designed according to the IOSCO Principles of Financial Benchmarks, the BRR computes price by compiling and calculating data from a number of Bitcoin exchanges including Bitstamp, GDAX, itBit and Kraken.
The implications of this Bitcoin futures product launch are far-reaching. It signifies both mainstream network adoption and a reduction in price volatility. As an investment product, it can readily fit into the stock portfolio of a traditional investor.