CME Bitcoin Futures Roll & Liquidity Report — August 2018
By @crandl
Highlights:
- CME Group Bitcoin futures for August(Q) contract expired this morning. The Bitcoin Reference Rate settled at $6925.56 vs $7855.26 in previous July (N) expiration. Trading settlement in August bitcoin futures was very quiet and straddled the theoretical rate by $10 early in pricing period and $5 in last 30 minutes of pricing period. Holiday summer trade, with only 87 contracts in August contract traded in one hour settlement period. CryptoFacilities publishes the Reference Rate and more info can be found here.

- Calendar spreads between August and September Bitcoin futures traded in backwardation (front month August(Q) traded higher than back month September (U)) a majority of the month of August. To note, this was different trend than previous month calendar spreads spending a majority of time in contango.
- Crypto trading was slow in month of August with lower volatility and volume. Many traders and investors are on holiday and we should see activity rebound to normal next week.

- In the big picture, profit margins are shrinking for market makers and prop traders as more competition trades cryptocurrency products. The market is very fragmented with over 200 exchanges competing worldwide.
- Bitcoin futures price was weak in August and closed at $6925.56, a decrease of -11.8%. Key levels to watch on downside are $6425, 6250 and 6000. Our upside targets are $7000, 7325 and 8400 and then to psychological $10,000 level.

Pain Points & Problems:
The lack of liquidity on crypto exchanges is hindering hedge fund and institutional traders.
While you might hear about traders making big money on bitcoin or Ethereum, the fact is that compared to forex markets, the volume being traded is still very small. This is especially true on a a majority of cash crypto exchanges, where even trying to buy US $50,000 at once can result in the market price moving, and the buyer paying more for coins. Regulated futures exchanges are more liquid, where buying more than $150,000 can result in paying more for coins.
I was chatting with a head trader at a Commodity Trading Advisor (CTA) with $500 million in assets under management, and his typical volatility adjusted risk size for his portfolio is 2%. He needs to trade approximately 1470 bitcoins per trade signal.
He said, “Low liquidity in bitcoin futures makes market impact costs too high. We can’t give up 50 basis points getting in the trade and 50 basis points getting out of trade. A typical product is traded 5–10 times per year, and the combined market impact costs would eat away at returns. We are constantly monitoring liquidity in all markets traded.”
As a curious crypto trader, I wanted to see the data. Here it is…

The data confirms that liquidity is a pain point for institutional traders. In a perfect world, if we bid $35 over current price of bitcoin (approximately 50 basis points) we would execute 91 CME bitcoin futures equivalent to 455 bitcoins. That’s only 31% of the order filled….
So, a few alternatives please….We can execute CBOE bitcoin futures, and the liquidity is similar, so now 62% of order filled.
The trader is right…He can’t execute trading size needed.
How about a bitcoin futures and cash block desk? Definitely an alternative but most block desks immediately hedge on different exchanges. This sometimes creates a buying frenzy and you end up with more market impact than going to the market. Maybe an alternative?
Here’s a possible execution problem. Believe it or not, high frequency traders (HFT) can pull orders or front run when they see a big order enter the market. We constantly see 1 million contract bids/offers in calendar rolls and options on certain CME products, a large trade happens, and 95% of liquidity vanishes. Trust me..They get out of the way fast.
The graph below shows snapshots of liquidity over multiple time periods for CME bitcoin futures.

CRYPTO TIDBITS FOR AUGUST:
Survey — Why People Won’t Buy Cryptocurrencies?
What’s going on here?
If you are a crypto exchange, these are some of the emotions you need to target to get new customers. FOMO not listed..Hmmm:}

The Size of Crypto Trades?
What’s going on here?
According to BitInfoCharts, the average trade value of BTC on blockchain for August 30, 2018 was US$41,796. However, the median trade value of bitcoin — the middle value of the sample size — was only US$356.41.
Why is this important?
The data shows the $BTC market is still very small retail.
Correlation or Causation?
What’s going on here?
Do coins move together in factors beside price? Bitinfocharts offers a different way of looking at correlation by calculating average of transaction count, block size, number of tweets… Below find correlation average by combining multiple factors for last 3 months.

Why is this important?
This makes sense. Many crypto prop desks actively trade relative value strategies between different coins. We will look at this closer in future reports.
Fun Tidbits:
Market Cap of all cryptos = $224,196,422,772 (-24.3% in August)
Bitcoin % of Market Cap = 53.24% (+13.01% in August)
# of Active Cryptos = 1911 (+5.8% in August)**Data from CryptoFinance
