The State Of Bitcoin Futures

January was the second-best month for CME Group’s bitcoin futures product since it first launched in late 2017.

In that context, we decided to analyze the CFTC’s Commitment of Traders (COT) report to unpack who is driving the growth in open interest, and compare how traders are currently positioning themselves (long or short) relative to historical net exposure.

Currently, only CME Group’s bitcoin futures product has any reportable traders within the CFTC reports (those trading more than 25 BTC or five contracts, ~$250K in notional value at $10K BTC price), with both CME’s Bitcoin options and Bakkt’s futures products still not drawing enough size from at least 20 reportable traders.

In 2020, CME has seen ~100% growth in open interest since Dec 31, and +100% growth since last February.

While Bakkt registered its largest open interest volumes this week, it still makes up less than 1% of CME notional OI value.

Given the low number of unique traders within this market, the concentration of net exposure within the four largest traders has typically been high. Last week the top four and top 8 largest long-positioned traders had contracted to all time lows of ~20% and ~27%, respectively, while falling more than 30% since the start of the product launch in 2018 (net concentration of total OI value among top 4 traders is now at 20% vs. 50% in May 2018).

In contrast, concentration among the top-4 short positioned traders has continued to move around an average of ~50%.

This may suggest that the growth in reportable traders is coming on the long side, with the same mix of larger traders selling/writing the futures.

Looking at the classification of reportable traders, hedge funds are the only ones that show up on the short side. Combined with the trend-less top 4 concentration of short traders, this suggests that a handful of larger funds are selling these futures in size (not necessarily to go net short, but likely to hedge underlying exposure within a portfolio).

At a higher-level, speculators and smaller non-reportable traders (non-commercial traders make up >75% most quarters) continue to drive the bulk of open interest notional volumes. Those that get classified as “commercial” traders, usually those that use futures for hedging purposes (typically on a commodity input cost), have continued to make up an immaterial portion of the total mix. This suggests that miners still aren’t using CME Group’s bitcoin futures for hedging purposes in size.

While CME bitcoin futures reportable traders have registered recent all time highs (~56 traders), and have seen OI more than double since last year (last week ~$250 million) it’s worth contextualizing how small the product still is relative to, say, CME’s gold futures product.

To be fair, it’s early days. CME gold futures have been around for nearly 50 years, and the total value of the underlying gold spot supply is somewhere around ~$8T (to bitcoin’s ~$200B). A better comparison would be to look at volumes between bitcoin today, and gold in say 1974.

Within one year of CME launching its gold bullion futures in 1974, volume in March of 1975 was ~$52.5 million. Three years later in 1977, gold futures volumes reached a record ~$233 million in notional value.

This compares favorably to bitcoin futures volumes which have been around less than three years and saw ~$800m in volume a couple days ago.

So, don’t judge a book by its cover, and don’t judge Bitcoin futures by their nascent nature.

Instead, look forward and see the possibilities of further expansion and trading ability ahead.