Deciphering the CME Bitcoin Futures Modus Operandi – Week One

The View from LaSalle Street #4

Here’s a mid-week update for you traders and curiosity-seekers on the week before the holidays – on my new favourite commodity (sorry: “security”) …. Bitcoin futures.

Let me give you the bottom line first … so you can get back to surfing the web and/or online shopping. Sentence #1, above, is all you really need to know. As senior traders such as myself (cough-cough) have been telling DIY traders for years – you do NOT trade during the serious holiday weeks. And hey! As it turns out, BTC is no exception. It would appear to me, at least, that both the CBOE and the CME knew darn well that to release their potentially problematic futures contract on one of the largest holiday arcs in the trading world could afford them some cover if events called for it.

The point is demonstrated in the volume numbers and how the actual players – who all need to open accounts with brokerages who are on the hook for their capital – are working, in real numbers rather than in theory. Like any of these thin-trading weeks, the volume numbers are suppressed. The CME contract traded around 1100 lots on Day One (or 5500 BTC if you wish to quote it that way), with very light short selling in evidence. Day two saw volume cut roughly in half, at 600 lots. Today (Wed, Dec 20 Chicago time) it appears to this semi-trained eye like there is some squaring up, with midday volume approx. 650 lots across all 4 contract months, and BTC’s price down between 1200-1500 bucks.

Why has the new ability to in effect short BTC not lead to greater losses? Hey, great question. Simple enough answer:

Most traders might take the role of the member brokerages, who take your money and afford you access to the clearinghouse exchange, somewhat for granted. They are, truthfully, on the hook for your capital and one’s ability to borrow (leverage, remember my earlier blog?) their capital in order for YOU to “borrow” the Security (BTC) in order to sell it short. {Futures 101 right there … Be sure to let me know if you need a primer, we’re happy to help here at ForexFlowLive}

The truth, in practice, is that MOST of the brokers who will afford you access to these futures markets will NOT allow shorting. Some do, at very high margin rates, but most do not. It’s a mixed bag, and it’s the real reason that the Whales are NOT driving BTC lower. When on the first week of the CBOE’s contract opened for the first time, (Dec 12) daily price changes rallied up to 8% each on two consecutive days. This week, with the CME contract open, at last, BTC touched $20,000 on two consecutive days. Not much to see here, short-sellers.

In summary – these are Holiday Markets – the bane of volume. Plus, in my opinion, the largest futures exchange in the world decided to release their new product somewhat defensively, during this precise time of year. Brokerages are also very much in defensive mode because whereas they are obligated to offer new product; but do so at great risk because the underlying (“OTC” Crypto BTC) operates on insane volatility. Bitcoin Futures is the Pork Bellies of the new millennia – but on steroids. You older Futures traders know what I mean. Forex traders – think GBP/JPY back when carry trades were hot and the BOJ was verbally intervening daily. 15 pip quotes were typical.

I’ve always counseled clients or those traders who trusted my judgement: these wild commodities are Heaven to watch and tell stories about – but Hell on the wallet. I reckon most BTC wannabe traders are getting that now widely-accepted fact, and sitting this one out. Let’s see where this is after a few weeks of actual data.

Stay tuned, traders…

Bill Hoerter

Trader, educator & author
William “ChicagoBill” Hoerter has worked in the financial services (Spot FX, Futures and Options) for 35 years, proving that old men may still be semi-lucid and analytical. In working on trading desks, he used to be the enemy but now helps those of us who love to trade understand the mindset of the Institutions and their counter-programming of the system against the average trader.
His new View from LaSalle Street is an attempt at helping to clear those misdirections.
Bill Hoerter

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