Bitcoin smashes records as US flags new derivatives product

Chicago-based CME Group, which runs one of the world's largest derivatives marketplaces, announced today that it is launching bitcoin futures trading in the fourth quarter of this year. The bitcoin price immediately spiked on the news, hitting a record high at $6,392 on the CoinDesk bitcoin price index.

This latest indicator of the coming-of-age of cryptocurrency as an asset class follows the start in October of trading in options by LedgerX, which, in its first week of operations, sold bitcoin swaps and options with a notional value of $1 million to institutional buyers.

Another Chicago-based exchange, and a CME rival, Chicago Board Options Exchange parent CBOE Holdings, signalled in August its intention to start trading bitcoin futures. CBOE is taking its data from New York-based Gemini Trust's digital trading platform.

CME's new contract will take its price from the CME CF Bitcoin Reference Rate (BRR) set once-a-day at the dollar value for bitcoin.

A derivatives market in bitcoin makes it easier for market makers to offer bitcoin trading as it provides them with a way of hedging their positions.

In addition to helping attract institutional investors by increasing liquidity, it also brings the possibility of an exchange traded fund (ETF) closer. ETFs have grown in popularity in recent years as they provide a cheap way for retail investors to track the price movement of an asset or index.

"Given increasing client interest in the evolving cryptocurrency markets, we have decided to introduce a bitcoin futures contract," said Terry Duffy, CME Group chairman and chief executive. "As the world's largest regulated FX marketplace, CME Group is the natural home for this new vehicle that will provide investors with transparency, price discovery and risk transfer capabilities."

CME uses data from Bitstamp, GDAX, itBit and Kraken to set it daily bitcoin price and has been working with Crypto Facilities in setting the BRR since November 2016. The price is set at 4.00pm London time.

The news comes as a surprise because in September CME president Bryan Durkin told Bloomberg: "I really don't see us going forward with a futures contract in the very near future."

Jordan Hiscott, chief trader at CFD and spread-betting broker Ayondo Markets, which recently introduced bitcoin trading for its clients, is still cautious about crypto as an asset class. "It's becoming somewhat repetitive to discuss new highs for the asset, as they occur so regularly. But does the increase in its market value, now to more than $100 billion, give it more credibility? I'm not certain on this, however, awareness of the asset has never been greater."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.