CME announced Tuesday it plans to launch bitcoin futures in the fourth quarter, pending regulatory review. Bitcoin rose to a record high above $6,400 Tuesday morning, according to CoinDesk, after the announcement by the world’s largest futures exchange.
“Given increasing client interest in the evolving cryptocurrency markets, we have decided to introduce a bitcoin futures contract,” Terry Duffy, CME Group chairman and CEO, said in a statement.
Duffy added on CNBC’s “Closing Bell” that he is “confident” the CME’s self-certification process at the U.S. Commodity Futures Trading Commission and full application process will go through. “We’ve been working with the regulator. They understand our application. And they understand our model very, very well,” Duffy said.
The leading global exchange for options and futures trading is the latest entrant into the business of offering derivatives for bitcoin, the volatile digital currency, which is not listed on a major exchange.
The bitcoin futures contract will be cash-settled and based on the CME CF Bitcoin Reference Rate (BRR), which CME launched in November 2016 with London-based digital trading platform Crypto Facilities. The reference rate is a daily settlement price published at 4 p.m. London time, currently noon ET.
In less than 10 years, bitcoin has come a long way from being “mined” in homes and predominately used to buy illegal goods online. An entire industry has emerged to mine bitcoin, sell digital mining equipment and offer bitcoin trading services.
The growth of bitcoin derivatives is another step toward the development of the digital currency as a more established asset class. Fundstrat’s Tom Lee said his call for bitcoin to top $20,000 by 2022 is based partly on expectations that bitcoin derivatives products will launch.
In August, the Chicago Board Options Exchange, the largest U.S. options exchange, said its CBOE Futures Exchange plans to offer cash-settled bitcoin futures by early 2018, pending review from the CFTC. CBOE is working with Gemini Trust, the digital currency exchange founded by brothers Cameron and Tyler Winklevoss, on using Gemini’s market data to create bitcoin derivatives and indexes.
The commission did not immediately respond to a CNBC request for comment.
“The addition of CFTC-regulated bitcoin derivatives will bring a great deal of liquidity and legitimacy to the cryptocurrency ecosystem,” Ari Paul, CIO and managing partner at BlockTower Capital, told CNBC in an email.
Paul pointed out that since many institutional investors cannot directly invest in bitcoin, the launch of derivatives by a major exchange gives the investors a way to buy into the digital currency market.
New York-based digital currency-trading platform LedgerX received the agency’s approval to clear derivatives in July, and began offering institutional clients the ability to trade bitcoin options two weeks ago. LedgerX CEO Paul Chou told CNBC in an email the company cleared $1 million in the first week and $2 million in the second week. He said he expects to see more exchanges launch similar products.
Despite the rapid increase, volume is still relatively tiny. Trade Alert, which tracks options data for CBOE, says the comparable figure at the exchange is $2.62 billion a day, including $1.7 billion for S&P 500 index options.