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Micro Bitcoin Futures, How Do They Work?

MICRO BITCOIN FUTURES

May 11, 2021 | 

512 Views | 

JOHN K MWANIKI | 

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The cryptocurrency market is increasingly expanding, and as the adoption of the world's largest crypto, bitcoin, continues to accelerate, more market participants are attracted to the thriving bitcoin futures market. However, some traders feel that the standard bitcoin futures contract with its underlying five bitcoin multiplier is too high for their trading strategies. For others, the value appreciation of bitcoin has made the standard contract extremely big for them.

Fortunately, you can now access a new tool as a trader to enter the bitcoin futures market and manage your risks. This new product is known as micro bitcoin (MBT) futures. It is a smaller-sized contract that allows a cost-effective and efficient way to fine-tune your bitcoin exposure and hedge bitcoin value risks. Simply put, micro bitcoin futures provide similar features to the standard bitcoin futures contracts but with a lesser capital requirement.

The Chicago Mercantile Exchange (CME) just launched its micro bitcoin futures product on 3rd May 2021, as they aim to capitalize on the bitcoin's price surge this year. The micro bitcoin futures product is based upon the 2017 successful launch of regular futures contracts for the world's most popular cryptocurrency, bitcoin. 

The idea behind bitcoin micro futures

Typically, traders who want to gain access to the bitcoin market and speculate on the prices without holding the currency itself utilize the bitcoin futures market to get exposure to the digital asset. The standard bitcoin futures have hiked in the market recently because investors have started piling into the real cryptocurrency.

Again, small traders are often unable to access the bitcoin futures market because they have smaller accounts. It is disappointing to bitcoin traders interested in trading bitcoins via the derivatives market, but the size of exposure the standard bitcoin futures offers does not sit well with them. 

Micro bitcoin futures try to solve the overwhelming demand by allowing traders to go small on bitcoin futures. Like similar futures contracts, traders will trade CME's micro bitcoin futures on margin borrowed money, which means a trader can control a more significant position with little capital. But it can work for or against you, depending on the size of your positions and the asset movement.

Features of micro bitcoin futures

Like the bitcoin standard-sized futures contract, micro bitcoin futures is a cash (USD) settled contract established on the Chicago Mercantile Exchange CF Bitcoin Reference Rate (BRR). The BRR acts as a once-daily reference margin of the price of bitcoin in US dollars. It accumulates the trade flow of the top bitcoin exchanges in an hourly calculation window into the USD value of one bitcoin.

While a regular BTC futures contract is equal to five bitcoin, the micro bitcoin futures contract equals a tenth of one bitcoin. That means the MBTC futures contract is 1/50 the volume of the large BTC futures contract. Here is an example; suppose the value of bitcoin according to BRR is $40,000. In that case, the notional price of 1 micro bitcoin futures contract is $4000.

The tick supplement of micro bitcoin futures equals five index points. That means one tick move in the micro bitcoin futures the same as $0.50. This information implies that micro bitcoin futures contracts are a cost-effective way to enter the increasingly popular bitcoin futures market.

Another notable thing is that micro bitcoin futures appear on the subsequent six-monthly contracts, including the most immediate two December contracts. Here is an example; suppose it's January, then the six successive contract months are from February to June. The platform will also list that year's December contract plus the subsequent year's December contract. That means, while one contract reaches its maturation date, another one to complete the six-month lineup appears on the list.

When the December contract matures, the June contract gets active and the December contract for the following year. The platform has listed six consecutive monthly contracts and two December contracts every year.

Moreover, MBTC futures contracts have the same maturation date as the regular bitcoin futures, which is the last Friday in 30days and settles in USD to the CME CF BRR during the final trading day. Traders will trade MBTC futures contracts from Sunday to Friday almost 24hours a day, including block trading.

Reasons to trade micro bitcoin futures

  • Micro bitcoin futures generate more volume than the regular bitcoin futures

Many retail traders cannot afford $54000 to buy one bitcoin. Many traders in the derivatives market are not interested in ownership but rather exposure. Micro bitcoin futures make it easier to hold bitcoin exposure for extended periods since the maintenance margins are less than standard bitcoin futures contracts.

  • A regulated market

Micro bitcoin futures are under the regulation of a US exchange which provides for more risk control.

  • More flexibility

Micro bitcoin futures traders can speculate on the value of bitcoin on the long and short positions without short-selling restrictions or uptick rule.

  • Transparency and price discovery

Micro bitcoin futures will enable traders to access transparent and better price discovery than the current cryptocurrency exchanges.

  • Less financial commitment

MBTC futures is a tenth of the standard BTC futures contract and 1/50 the volume of the larger bitcoin futures contract. That means it enables traders to capitalize on the bitcoin futures marketplace with a fraction of the cost and way less financial commitment.

CONCLUSION

Bitcoin is a very speculative currency, and the best way to get into some bitcoin action in the market is through micro bitcoin futures products. The smaller-sized contract provides a cost-efficient way to test the market and fine-tune your bitcoin exposure.

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