Looking at the Futures - June 11, 2020

Some room to grow...

Last week when I wrote this letter Bitcoin had just failed to break out over $10,000. We looked at how traders positioned themselves for the next leg up and what strategies did they use. And what happened since then? Nothing…

Looking at the Futures is a weekly newsletter where we are making sense of the Bitcoin derivatives market. Emphasis is put on the CME products as they dominate the field for institutional investors. But we’ll occasionally look at other venues too.

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Well not exactly nothing. I should say more of the same on the CME. Bitcoin is still below $10,000 and hasn’t made any new convincing attempt at crossing the line although we are inches away.

There hasn’t been any massive deleveraging in the futures market. And when you look at the options it is bull call spreads… bull call spreads EVERYWHERE!

The lack of volatility in the Bitcoin price has dampened the trading activity on the futures compared to the last few weeks. But if you check out what happened yesterday, a very brief push at $10,000 caused a big jump in volume and open interest on the futures.

So it is clear everybody is looking for the upside. Right now we have about 40,000 Bitcoin worth of open positions on the June contract which is about US$ 400 million. That’s the largest amount of contracts ever sitting on the front month for the CME!

Let’s appreciate how much the futures have grown so far this year:

  • January 02, 2020 Open Interest 18,250 BTC

  • June 10, 2020 Open Interest 50,880 BTC

That’s almost a 3x growth in six months. And Bitcoin is still well below its $20,000 max reached in December 2017… FOMO hasn’t even started!

Let’s not forget about the CME options market. It is only a few months old but it has expanded incredibly fast in the last month.

  • May 08, 2020 Open Interest 3,870 BTC

  • June 10, 2020 Open Interest 37,685 BTC

That’s a 10x growth in one month! And most of it is fuelled by bull call spreads positioned to capture the next Bitcoin move up between $10,000 and $15,000. 

From last week nothing has changed on that front. I mean except that there are even more call spreads than before. But the spirit remains the same.

The commitment of traders report does not give us too much information this week. Indeed the data we have is dated of June 02 which is the day of the failed attempt at clearing $10k. 

The way traders reacted to that:

  • The smart money went even more net short.

  • The retail money moved to be more net long.

No big surprise there.

But since then open interest is significantly up on the futures and new call spreads have popped up on the options market.

I’m going to guess that the new spreads are mostly a leveraged funds play. The retail way of getting bullish is to buy more futures. The leveraged funds might be a bit more sophisticated in their approach to trading around the $10,000 strike with options. 

So while waiting for the moon we can take a moment to dream. Dream and do back of the envelope calculation. Remember, Bitcoin is still only a niche market. Let me give you some numbers to put things in perspective. As it relates to the CME we have roughly:

Bitcoin

  • market cap US$ 0.118 Trillion

  • size of the CME futures market US$ 509 Million

  • size of the CME options market US$ 377 Million

Gold

  • market cap US$ 9 Trillion

  • size of the CME futures market US$ 83 Billion

  • size of the CME options market US$ 218 Billion 

SP500

  • market cap US$ 28 Trillion at the beginning of the year

  • size of the CME futures market US$ 520 Billion

  • size of the CME options market US$ 410 Billion

That means the gold market is about 75 times larger than Bitcoin and the SP500 is about 237 larger than Bitcoin. There is plenty of room to grow to simply get Bitcoin on an equal footing with gold.

More interesting, if we look at the size of the CME derivatives compared to the market cap (CME futures + options / market cap),we have:

  • Bitcoin 0.8% 

  • Gold 3.3%

  • SP500 3.3%

That probably means that when have more institutional money moving into Bitcoin we will also see the size of the CME derivative products increase towards the 3.3% mark. 

Take these numbers with a grain of salt. All of that is just napkin math. But it is good enough to tell us that Bitcoin is still a small part of finance with a lot of potential. It is definitely not too late to get in the game! 

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