Bitcoin and ether have proven themselves as worthy additions to investors’ portfolios. But as with any new investment, crypto comes with its own set of unique risks and opportunities. This guide explains how CME Group Micro Bitcoin (MBT) and Micro Ether (MET) futures work, and how investors can use them to help navigate crypto’s risks and potentially profit from its opportunities. This is the third and final piece in our series about the role futures play in a portfolio, building on the concepts discussed in the first two articles.
It’s all in the name. A futures contract is an agreement where an investor commits to buy or sell an asset for a set price on a future date. Recall from our second guide that micros are a type of futures contract, only smaller. Like futures, micros let investors trade the price swings of an asset without having to actually own that asset themselves. And in the case of Micro Bitcoin and Micro Ether futures, those assets happen to be cryptocurrencies.
Standard size crypto futures (and micros) offered by CME Group bring two main advantages for investors. First, there’s no need to custody the crypto, which removes the risk of having to safely store it. That means you don’t need to have a wallet, or worry about hackings, or insurance. Sure, there are decent crypto custodians out there, but futures offered on a regulated exchange simply track the price of bitcoin or ether, and settle in USD. So, by trading crypto futures instead of crypto itself, investors can bypass a bunch of operational hurdles.
Second, these are regulated futures under the US CFTC regulation. That means there are rigorous checks and balances that happen. Your funds are fully segregated, your position cant be auto-liquidated without warning, and each trade is centrally-cleared.CME’s clearing house becomes the buyer to every seller, and the seller to every buyer. This effectively removes the risk of whoever the trade is with from going bust.
Third, futures make it easier for investors to short crypto. Let’s face it, bitcoin and ether are no strangers to volatility. And while more aggressive investors might embrace that, others are far more risk averse. But no matter where an investor falls on that spectrum, shorting digital assets – essentially betting that their price will fall – could well play a part in their strategy. Those who like more risk can short futures to try and profit from bitcoin or ether’s downside moves. Other investors, meanwhile, can short futures to hedge the bitcoin or ether they already own. This way, they can offset some losses if their crypto portfolio takes a dive.
No matter the strategy, Micro futures have one big advantage over regular futures: they’re a lot more accessible to smaller investors. One Micro Bitcoin future (ticker: MBT) is set to one-tenth of a bitcoin, 50 times smaller than a full-sized contract (BTC). One Micro Ether future (ticker: MET) is also one-tenth of an ether, which is 500 times smaller than its full-sized counterpart (ETH). For the Micro Ether futures contract, the notional size is about $200.
Say you buy one MBT when bitcoin’s price is $20,000. Remember, the value of a contract is one-tenth of a bitcoin – so in this case, that’s $2,000. But you’ll also need to understand the tick size. That’s the smallest possible price movement of the contract, based on a five-dollar change in the price of bitcoin. So, because one-tenth of five dollars is 50 cents, the value of your MBT contract will increase (or decrease) by 50 cents each time the bitcoin price goes up (or down) by five dollars.
If you are buying bitcoin or ether on a spot exchange, you will need to fully fund the position before you trade. An advantage with futures is that you only need to put down the initial margin requirement, or the amount of money you need as collateral to open your trade. With MBT, that’s one-fifth of the contract size. So, assuming you put down the initial margin, you’d be risking $400 of your capital for a $2,000 MBT contract. In other words, you’d be trading MBT with five times leverage. That means if the bitcoin price goes up by 1%, you’d be up 5% on your trade. But keep in mind that leverage works both ways, so your loss would be five times bigger too.
Then there’s the maintenance margin requirement, the amount of money you’ll need in your account to keep your trade open each day. So, say the bitcoin price drops by $1,000 (5%) in a day, then your MBT contract will be down $100 (also 5%). But your leveraged trade will be down 25% – recall the five-times multiplier. Because you started with $400 of margin, that $100 drop in the value of your MBT contract leaves you with $300 in your account. Now your margin balance would only cover 15.8% ($300 margin divided by the $1,900 MBT value) instead of the required 20%. That means you’d need to top up your margin to stay in your trade.
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Just like futures for stocks and commodities, crypto futures have different expiration dates. MBT and MET contracts expire on the last Friday of each contract month (just like their full-sized Bitcoin and Ether futures counterparts). At that point, there are three things an investor can do:
Close the position: With futures, you can exit your trade by taking an equal and opposite position. For example, if you were short five MET contracts at the expiration date, you’d need to buy five MET contracts to settle up. Since crypto futures are “cash-settled”, you’d pocket (or lose) the difference between the two offsetting positions. Keep in mind that most traders prefer to close their positions before the contract expiration date, because it gives them more flexibility to lock in profits or minimize losses at a better market price.
Let the contract expire: If you simply do nothing at the expiration date, your contract would expire at the agreed futures price. So, if your MBT contract was to buy bitcoin for $21,000 at expiration, and the bitcoin price is $22,000 on the day, you’d pocket $100 (one-tenth of $1,000). Since they’re cash-settled, the funds would just go straight to your account.
Roll the position: You might want to stay in your trade or hedge. In that case, you can roll your position by moving it onto next month’s contract. For example, if you were short one June MBT contract, you’d buy one June contract to square off – then sell one July contract to stay short. This can all be done in one simple trade.
Note that investors pay different fees to open, close, or roll a position, so they’d also need to factor those into their strategy.
You’ve got the basics down, so now it’s time to try futures trading for real.
Well, real to a point. Practice futures trading on the CME Institute Trading Simulator, and give your strategies a test drive and review the outcomes while not putting any real money on the line.
That way, you can note down what did and didn’t work, and use CME Group’s resources to figure out the “why.” Therefore, by the time you really start trading, you’ll have a wealth of experience.
Crypto spot markets are open all day, every day. CME Group offers futures on six asset classes including equities, FX, interest rates, metals, agriculture, energy, and now crypto. With tens of millions of contracts trading a week across asset classes, the weekend is needed to take care of operational maintenance, and so futures trade Sunday evening though Friday night. Usually the futures move generally in line with the actual – or “spot” – price of bitcoin or ether, except sometimes on weekends, when you might find “CME gaps”. So, if the price of bitcoin has a big move while CME is closed, you get a gap when the futures price reopens near the spot price.
CME gaps are closely watched by crypto traders, as prices tend to revisit them later on. Tracking CME gaps can be a valuable addition to your crypto strategy.
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
This guide was produced by Finimize in partnership withCME Group.
Check out CME’smini-websiteat finimize.com.
Disclaimer: CME Group futures are not suitable for all investors and involve the risk of loss. Full disclaimer. Copyright © 2023 CME Group Inc.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.