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Ethereum Institutional investment Derivatives OKEx Insights

How the CME ETH futures launch this week is different from BTC futures in 2017

2021.02.13 OKEx

A closer look at the launch of CME’s Ether futures and its potential impact on the price of ETH

Ether futures launched on the Chicago Mercantile Exchange on Feb. 7, 2021. The highly anticipated instrument is the first of its kind for the native coin of the Ethereum network — coming from an established, world-renowned exchange.

In this OKEx Insights report, we examine CME's new product and its implications for the ETH market. In doing so, we analyze recent ETH price action and compare it to BTC's price history before, during and after the launch of CME Bitcoin futures — since prior trends in the latter may shed some light on potential future ETH price moves.

But first, a quick note — today's cryptocurrency industry is different to that of late-2017. Therefore, the reliability with which BTC's price history can inform ETH's own trajectory remains to be seen.     

A closer look at CME Ether futures

CME's ETH futures are a new cash-settled financial instrument based on the price of Ethereum's native coin. They trade under the product code "ETH" between 11:00 pm and 10:00 pm UTC, Sunday through Friday. Each contract is for 50 ETH and is quoted in the current USD/ETH price, as per the CME CF Ether-Dollar Reference Rate. Importantly, the contracts will expire on the last Friday of the relevant contract month.

CME is the world's largest derivatives exchange. It routinely sees daily volumes and open interest into the tens of billions of dollars. While OKEx and other trading venues have been offering their own ETH futures contracts for some time now, the influence that the CME carries in the traditional markets certainly does a lot to legitimize Ethereum to a new class of investors. 

ETH market dominance increased since CME announcement

In the weeks since CME announced ETH futures on Dec. 16, the price of ETH increased from around $662 to a recent all-time high of more than $1,825. However, just about every major cryptocurrency experienced significant price gains of their own during the same period. Therefore, it is difficult to gauge the true impact that the new instrument has already had on the price of Ethereum's native asset.

That said, comparisons between the total cryptocurrency market capitalization and those of BTC and ETH suggest that CME's nod of approval has encouraged proportionately more ETH buying. In terms of percentage gains between the initial announcement and launch on Feb. 7, ETH outpaced both the wider market and BTC.

At just over $67 billion on Dec. 16, the ETH market cap swelled to more than $192 billion — an increase of approximately 186.5% — as ETH futures went live. Over the same period, the BTC market grew from $365 billion to $725 billion — an increase of roughly 98.6%. The overall cryptocurrency market increased from $574.1 billion to $1.2 trillion, or approximately 110%.

The ETH market cap increased by roughly 186.5% since CME announced ETH futures. Source: CoinGecko

The rising market dominance of ETH versus the rest of the industry also suggests particular enthusiasm for ETH following CME's announcement. Accounting for 11.64% of the entire cryptocurrency industry on Dec. 16, ETH's total market share peaked above 17.5% on Feb. 5, as per data from TradingView.

"This time, it's different"

In the run-up to ETH futures going live, many observers were quick to remind the most euphoric Ethereans of BTC's debut on the CME. Following the announcement of the similarly hyped cryptocurrency derivative on Oct. 31, 2017, the BTC/USD price rallied from around $6,500.

It peaked just below $20,000 on Dec. 16, the day before CME's Bitcoin futures launched. A year-long bear market immediately followed that suppressed BTC prices to lows of around $3,220 by December 2018.

The BTC price fell by around 83% between Dec. 2017 and Dec. 2018. Source: CoinGecko

Like BTC in late-2017, ETH hit a new all-time high in the days immediately preceding its CME futures launch. However, the wider context surrounding both events is entirely different. BTC futures began trading after multiple months of parabolic gains. The leading cryptocurrency broke its prior all-time high on Jan. 4, 2017 — almost a year before BTC futures launched. By December, a full-blown speculative mania, driven in part by the initial coin offering craze, had engulfed the market. Anything blockchain-related was receiving undue investor attention. The hype pushed the BTC price above the $1,130 high set in late-2013 by over 1,600%. In hindsight, a blowoff top was inevitable.

In contrast, ETH futures went live at what many believe to be the beginning of a multi-month bull market. When CME launched the instrument this week, the ETH price had recently surpassed its prior all-time high of around $1,450. Indeed, in the days since launch, the second-ranked digital currency by market cap continued its ascent — reaching a new high above $1,825 on Feb. 10. 

In the case of ETH, the legitimacy the CME launch brings may complement the recent taking out of the all-time high. After years trading below a market top, new highs often lead to more upside — rather than an extended correction.  

Cryptocurrency industry is more mature in 2021

Supporting the case for continued ETH upside is the cryptocurrency market's increased maturity in 2021. The 2017 bull run was retail-driven. By contrast, evidence suggests growing institutional interest in BTC and ETH, today.

Grayscale, the largest digital asset manager, has been buying up huge quantities of ETH in recent months. In its Feb. 10 assets under management disclosure, the company announced ETH holdings of $5.4 billion. 

The allocation represents a more than 200% increase from the $1.79 billion it declared on the day CME announced its ETH futures contracts. The institutional-friendly investment company supported its increased buying in a February report detailing Ethereum's value proposition to clients.  

Analysts believe that decentralized finance's potential may also be attracting institutional ETH investors. While protocol-specific exploits and smart contract vulnerabilities continue to represent a barrier to entry to the planet's largest money managers, some commentators believe that institutions are investing in ETH as a way to benefit from the growth of the still-high-risk sector.

How CME futures may impact the ETH price

Despite being cash-settled and not requiring any actual ETH to change hands, the Ether futures launch seems complementary to the increasingly bullish sentiment surrounding Ethereum. While the new product is unlikely to trigger a multi-year bear market, there is evidence to suggest that the contracts themselves may impact the ETH price on shorter time frames.

The introduction of futures contracts allows pessimists to bet on price depreciation, creating downward price pressure on the underlying asset. Numerous studies have explored the relationship between the spot BTC price and futures trading. Indeed, some even speculate that CME's Bitcoin futures offering was, in part, an effort to control BTC's price. 

Like CME's new ETH product, the exchange's BTC futures expire on the last Friday of the relevant contract month. Analysis of BTC and other markets notes increased volume and volatility around futures expiration dates. 

Equities.com concludes that sell-offs typically precede contract expiration, with BTC price often rebounding in the 24-hours immediately following. Similarly, a 2019 report by Arcane Research observed an average BTC price drop of 2.27%, along with spikes in volume and volatility, during the days leading up to expiry. Likely causes for such shifting market metrics are the sudden reshuffling of traders' positions as expiration approaches along with efforts by the largest market participants to shift the price favorably.        

Like the run-up to the launch of BTC futures, the CME's new Ether derivative already appears to have had a positive impact on the price of ETH. Acceptance from one of the planet's largest trading venues has encouraged greater institutional buying, as evidenced by Grayscale's growing ETH allocation.

However, occurring within entirely different phases of their respective market cycles, a prolonged ETH sell-off in the wake of the futures launch seems unlikely. Enthusiasm for Ethereum — partly driven by the growing DeFi sector it supports and partly by a bullish BTC price action — appears to be building but is nowhere near the fever pitch of late-2017.     

At the end of the first week of trading, it is too early to determine whether those observations drawn from trends surrounding CME's BTC futures expiration will hold true for the ETH price. However, given that BTC seems to exhibit the same general trends as more traditional markets surrounding futures expirations, it may be fair to conclude that ETH will behave similarly. The days preceding the last Friday of the month will certainly be ones to watch for those actively trading the foremost altcoin.   


OKEx Insights presents market analyses, in-depth features and curated news from crypto professionals.

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Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involve significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.

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