CME Group to launch Bitcoin Options in 2020 - OhNo "WTF" Crypto

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CME Group to launch Bitcoin Options in 2020

#crypto #bitcoin

Derivatives exchange operator, CME Group, announced plans to launch regulated Bitcoin options in Q1/2020 pending regulatory approval.

Options provide the holders with the right but not the obligation to buy (or sell) an underlying asset at a predefined price at a specific date in the future. They can be used for hedging or speculative purposes, and are a more flexible and cheaper financial derivative than futures.

For example, a Bitcoin mining operation could hedge itself against a steep drop in the price of Bitcoin (BTC) by buying put options on the digital currency. The mining company could purchase Bitcoin puts with a strike price of $6,000 and a three-month expiry. That would mean if the price of Bitcoin was to drop below that level, the Bitcoin put option contracts would be “in-the-money,” which would enable the miner to recuperate mining losses with earnings from the derivatives position. Should the price never drop to that level, the miner would only lose the premium (i.e. the fee) paid for the option.

The CME Bitcoin options will use the CME CF Bitcoin Reference Rate (BRR) for pricing and will settle in the derivatives exchange’s CME Bitcoin futures contracts. That means the CME Bitcoin options will be options on futures contracts - not options that have “physical” Bitcoin as their underlying asset. This feature should make it easier for CME to receive regulatory approval for this new digital asset offering.

CME expects strong Asian demand for BTC options

Tim McCourt, CME Group’s global head of equity products and alternative investments, told the South China Morning Post that he expects that the exchange will see strong demand from miners and traders based in Asia.

According to McCourt, Bitcoin futures are already a popular way for Bitcoin companies and investors to hedge their digital currency exposure. Companies that are naturally long Bitcoin, such as miners, are major users of Bitcoin futures. CME Bitcoin options, however, will enable companies and investors to manage their risk in a more precise manner.

_“While futures give you a one-for-one exposure, whereby the movement of the underlying Bitcoin translates directly to a specific dollar value per contract, an option gives you varying strike-price levels and can give you either downside protection, or upside exposure at a fraction of the underlying [asset’s] price,” _said McCourt.

McCourt expects the new CME Bitcoin options to become as popular as the exchange’s Bitcoin futures offering. CME Bitcoin futures experienced the best-ever day on May 13, 2019, when 34,000 futures contracts worth $1.3 billion were traded on the derivatives exchange.

European and Asian traders make up around half the trading volume for Bitcoin futures, which would suggest that the upcoming CME BTC options may see a similar customer demographic. With the bulk of Bitcoin miners located in Asia, the CME’s prediction of high demand out of Asia will likely turn out to be correct.

What will Bitcoin Options mean for Bitcoin?

As more regulated financial products linked to Bitcoin are launched, the better for the digital currency’s awareness level and adoption as an investment asset. However, similarly to the launch of Bakkt futures last month, the launch of CME’s Bitcoin options are unlikely to cause an aggressive price movement in one direction or the other.

Since the CME Bitcoin options will be options on futures as opposed to options on a physical asset, the introduction of regulated Bitcoin options on the CME should not have a massive impact on Bitcoin. The settlement will be in Bitcoin futures, which are cash-settled, so no actual Bitcoin will exchange owners in these transactions.

CME Bitcoin options will, however, enable Bitcoin companies to hedge their digital currency exposure in a more precise and affordable manner. That could help the growth of the Bitcoin startup ecosystem in the long-run.

Additionally, Bitcoin options traded on a reputable exchange such as the CME has the potential to introduce more Wall Street players in the digital asset markets, which could eventually lead to more buying of actual Bitcoin and other crypto assets in the future.

For those that have been following Bitcoin for several years, it is fascinating to see that traders will soon be able to trade futures and options on “magic internet money” on one of the largest derivatives exchanges in the world. Bitcoin’s ascent continues.



Alex Lielacher, Khareem Sudlow