CME Discount
CME crypto futures are priced differently compared to major crypto exchanges. CME Bitcoin futures have discounts to values at Deribit and Binance, but CME Ethereum futures are traded in line with Deribit and Binance. Is it more than a liquidity effect? And why do CME traders have different views on ETH/BTC?
CME is different from crypto exchanges
The Chicago Mercantile Exchange (CME) is one of the largest global exchanges. It focuses on derivatives and is the only major traditional finance marketplace offering crypto futures. That makes it a bridge between crypto and broader financial markets. Large investment funds usually have no access to crypto exchanges but can trade on CME.
On the other hand, in the crypto world, CME is just one of many exchanges. For example, Binance is significantly larger than CME by Bitcoin futures open interest.
Market shares of major exchanges (by Bitcoin futures open interest)
Thus, a price difference between CME and purely crypto exchanges may reflect a difference in views of traditional financial markets and crypto markets. This difference is not easy to arbitrage, because crypto exchanges have significant credit risk.
CME spreads
Bitcoin futures currently have approximately the same prices on Deribit and Binance, but not on CME. Bitcoin futures expiring on September 30 are 0.7% cheaper on CME than on Deribit and Binance. In annualized terms, it’s about 10%. That might not look like very much, but the difference between CME and Binance is 10 times bigger than the difference between Deribit and Binance. Bitcoin futures are very liquid on all these exchanges, so I believe that the current difference is too big for a liquidity effect.
Ethereum futures on CME are slightly more expensive compared to Deribit and Binance, but in this case, the difference is not very significant and may reflect liquidity.
Current discount of Bitcoin and Ethereum futures* to spot (%)
* Most liquid CME crypto futures have September 30 expiration date, so I compare them with the same date futures trading on Deribit and Binance
This year, the difference between CME futures and the spot prices varies from a 2% discount to a 4% premium for Bitcoin and from a 4% discount to a 5% premium for Ethereum. Recent values are near the lower bound of this year's range.
Premium/discount of CME Bitcoin futures* to spot (%)
* The nearest quarterly futures
Premium/discount of CME Ethereum futures* to spot (%)
* The nearest quarterly futures
ETF effect
A clue to the difference between CME Bitcoin and Ethereum futures may be the availability of Bitcoin exchange-traded fund (ETF). Unlike Ethereum, Bitcoin futures on CME are strongly influenced by ETFs. There are 2 ETFs on Bitcoin futures (BITO for long exposure and BITI for short exposure) with total assets of about $900 million. These ETFs are the primary vehicles used by US stock market traders to bet on crypto. ETFs on physical cryptocurrencies are not yet approved by US regulators. Grayscale trusts are available for trading but are suitable for long-term investors rather than short-term traders.
CME data show that asset managers’ positions in Bitcoin futures largely increased in October 2021. I bet it’s no coincidence that BITO ETF was launched in October 2021 too. Futures combined positions always net zero, so the increase of long positions by asset managers was mirrored by the rise of short positions by hedge funds.
Net positions of CME Bitcoin futures by trader category
The availability of ETFs makes Bitcoin more correlated with stock market trends compared to other cryptocurrencies.
Profit taking or effect of the Merge
CME Ethereum future prices may have been supported by short positions liquidations this year. The CME data for Ethereum futures show large-scale short positions of hedge funds. Unlike Bitcoin futures, in this case, hedge funds’ positions look more like speculation than providing liquidity. These shorts were accumulated in the second half of last year and largely reduced this year (note the chart below is in USD terms, but changes in hedge funds’ positions are still very large after excluding a price effect).
Net positions of CME Ethereum futures by trader category
Possible reasons for these shorts liquidations are profit taking (although I estimate that average profit, if any, was not large), expectations of the Merge, or most probably a combination of these factors.
Conclusion
Bitcoin is more geared to broader financial markets compared to Ethereum and other cryptocurrencies, and this connection is enabled primarily by CME instruments. In my view, recent CME positioning data and flows suggest that current negative sentiment reflects broad stock market concerns rather than crypto-specific issues.
Direct arbitrage between CME and crypto exchanges is riskier than it seems because crypto exchanges have significant credit risk.
The most obvious way of using current prices is hedging for the Merge via CME Ethereum futures instead of futures traded on crypto exchanges (if an investor buys the spot Ethereum and sells a future to hedge a possible fork). Compared with Binance or Deribit, CME futures are slightly better priced and carry no credit risk.
*This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.
