CME Bitcoin Futures Market: Challenges in Bitcoin Price Discovery

In December 2017, Chicago Mercantile Exchange Group (CME) launched one of the first ever regulated bitcoin futures markets to service bitcoin futures contracts. A futures contract is a financial instrument that provides market participants with a centralized mechanism for price discovery, insurance and price speculation. It is thus a popular tool for trading unconventional commodities (e. g. ETF Futures) or commodities with volatile prices (e. g. Cocoa Futures). Bitcoin is an unconventional digital commodity and payment system that allows for peer to peer transactions (Nakamoto, 2008). Given bitcoin’s dual commodity- currency attributes and its limited supply, bitcoin price has been historically very volatile. Since bitcoin is an unconventional product with high price volatility, there has been much anticipation of CME realizing bitcoin price convergence. But is it truly possible for CME’s bitcoin futures market to achieve bitcoin price discovery? The paper concludes that the possibility exists, but first CME will need to address certain fundamental challenges in the short term (three years); specifically issues related to bitcoin futures contract valuations, bitcoin price forecasting, and concerns related to sustaining high transaction volume and open interest to keep the bitcoin futures market in effect. The first section of the paper reviews futures market, price convergence theory, and provides contract specifications for the CME bitcoin futures market. The second section of the paper highlights the need for CME bitcoin futures market to improve its contract price accuracy and market efficiency. The last section of the paper summarizes findings, highlights importance of the research question and offers suggestions for further research in bitcoin price convergence. Given insufficient reliable data on bitcoin futures markets and bitcoin price (bitcoin is classified differently across the globe and is priced differently on regulated and unregulated exchanges), the paper instead applies qualitative analysis to explore the possibility of CME eventually achieving bitcoin price discovery.