How CME Group’s Bitcoin Futures Will Work

The US Commodity Futures Trading Commission (CFTC) confirmed Friday that CME Group and CBOE had met the requirements for regulated trading, while Cantor Exchange would also be able to debut Bitcoin binary options.

Futures contracts allow traders to speculate on the price of an asset without actually having to own the asset. The speculators profit by buying or selling a contract in anticipation of the asset’s price moving in a certain direction. In CME Group’s Bitcoin futures market–that they expect to have up and running by the end of Q4-each contract will represent five Bitcoins.

If a trader is selling their contract, they are called a short speculator, if a trader is buying a contract, they are called a long speculator.

Although there is often a minimum number of contracts that a trader must purchase, to keep this example simple, let’s say Bob wants to buy one contract and the price is $50,000 ($10,000 per Bitcoin).

Before Bob owns the contract, Bob will need to deposit the initial margin.  The initial margin is often called a “good faith” deposit. Similar to a down-payment, a good faith deposit is a deposit into a trader’s account that shows that the trader intends to follow through with their contract. The initial margin is a percentage of the total contract that is often around five to 10 percent of the total contract. If Bob’s initial margin is 10 percent, Bob will own the contract after he deposits $5,000 into his trading account.

Now let’s assume Bob deposits $5,000 to buy the contract and is a long-speculator, meaning he believes/hopes Bitcoin price will rise above the spot price he paid for his contract–10,000 per Bitcoin.

CME Group has set the tick–the minimum price movement of the trading instrument–for their Bitcoin contracts at $5.00. This means that if Bitcoin price increases by $4, Bob  will not realize a gain/loss on his contract, because $4 is below the minimum tick. However, each time Bitcoin price increases by $5, Bob will gain/lose $25 on his contract (because each contract is composed of five Bitcoin)

The day after Bob Purchases his contract, let’s say Bitcoin price rises by $100 . Because Bob owns one contract,  the minimum tick is $5, and with each tick Bob earns $25, Bob will gain $500 on his contract (20*)(25)=$500.

On the other hand, if Bitcoin price declined by $100 during the trading day, Bob’s would lose $500 on his contract and Bob will see the funds in his trading account diminish…

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