20 October 2020 - Article
This article was initially published by Barron's on December 23, 2017.
Two derivatives exchanges, the Chicago Board Options Exchange and the CME, recently launched futures trading on the digital cryptocurrency bitcoin. These securities don’t trade actual bitcoin, but instead are based on indexes of bitcoin prices that are calculated slightly differently. Putting aside the risk reflected in last week’s roughly 40% bitcoin plunge, these aren’t retail-friendly products in their current form. However, market observers expect that to change over the next six months.
CME’s bitcoin product (ticker: BTC) is based on a reference rate using the dollar value of trades on major bitcoin spot exchanges during a one-hour calculation window every day. Cboe’s bitcoin product (XBT) is based on one exchange’s activity, Cameron and Tyler Winklevoss’ Gemini Trust Company, which is a digital asset exchange and custodian subject to the banking compliance standards of the New York State Department of Financial Services, including anti-money-laundering statutes.
Tom Sosnoff, founder of online brokerage tastyworks, says there are negligible differences between the two products beyond how trades are settled. Neither involves delivering actual bitcoin to traders. Their main purpose is to allow traders to hedge their exposure in underlying bitcoin if they hold some already, or to gain exposure to bitcoin without holding any of the cryptocurrency.
AMONG THE BROKERAGES that we regularly cover, Interactive Brokers, TD Ameritrade, TradeStation, tastyworks, and E*Trade allow futures customers to trade at least the CME or Cboe versions of bitcoin futures.
The Cboe product is based on one bitcoin, while the CME version is based on five. As a result of the huge price gains prior to last week, the CME product’s underlying value is much larger than the Cboe’s, which has put a damper on CME trading volume, notes Interactive Brokers’ Steve Sanders. His Interactive Brokers colleague Andrew Wilkinson says just 700 contracts for the January 2018 product on the CME traded as of Dec. 20, compared with 4,000 of the Cboe product.