CME Announces ETH Futures Coming Feb 2021

The CME has quietly announced within the last few days that they will be launching a futures product for Ether coming in February 2021. Although this product is pending regulatory approval, it seems likely to be approved, given they have already built the infrastructure and currently offer a Bitcoin futures contract. When the CME first announced the Bitcoin futures offering in Oct 2017, Bitcoin was trading ~$6,400. Seen in the image below, the price of Bitcoin surged to all-time highs in the lead up to the new product launch. There was a general sense of euphoria and excitement in the market as Bitcoin seemingly made new highs almost daily. By the time CME launched their futures product, Bitcoin had risen to a price of ~$19,500! (This was slightly more than a 3x increase in price!) Unknown to the market at the time, the first day of CME trading basically marked the high of the Bitcoin price for the next 3 years.

There are several fundamental drivers that could have contributed to the run up leading to the launch. In a functional marketplace, there are participants called market makers, whose role is to fill transactions for customers and provide liquidity. Due to the zero sum nature of the futures market, any retail/institutional buyers of the CME BTC futures contract (long) would by necessity mean that the market maker is short (sold it to the buyer). There are limited amount of ways to hedge that directional risk for the market maker outside of the spot market. So it seems reasonable and plausible in hindsight that market makers were buying physical Bitcoin in anticipation of the launch of the futures contract in order to properly hedge their risk and exposure. If someone chose to sell the futures contract, the market maker would then be long both the futures contract and long the physical Bitcoin. In order for the market maker to hedge his risk in this scenario, he would sell his physical holdings in the appropriate quantity to offset.

Will market makers choose to acquire inventory (ETH) leading into the launch of the Ether futures product? Will it have the same effects on the direction of price? Only time will tell.

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