Assets, Bitcoin

What Is Bitcoin Derivatives?

A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates, and market indexes.

Derivatives can be used for a variety of purposes, including hedging, speculation, and arbitrage.

Bitcoin derivatives are financial contracts that derive their value from the performance of Bitcoin. The most common types of Bitcoin derivatives are futures and options.

Futures are contracts to buy or sell an asset at a future date at a price agreed upon today. Options are the right but not the obligation to buy or sell an asset at a future date at a price agreed upon today.

Bitcoin futures were first offered by the Chicago Board Options Exchange (CBOE) in December 2017. The CBOE contract was based on the Gemini auction price for Bitcoin, which is denominated in U.S. dollars.

The contract had a tick size of $1 and was traded in lots of five bitcoins. The CBOE has since discontinued its Bitcoin futures contract.

The Chicago Mercantile Exchange (CME) began offering Bitcoin futures in December 2017. The CME contract is based on the CME CF Bitcoin Reference Rate (BRR), which aggregates the trade flow of major Bitcoin spot exchanges during a specific calculation window into a once-a-day reference rate.

NOTE: WARNING: Trading Bitcoin Derivatives is a high-risk activity and should not be undertaken without extensive knowledge of the market and a thorough understanding of the risks involved. Bitcoin derivatives can be extremely volatile, and losses may be significant. Professional advice should always be sought before engaging in such speculative activity.

The BRR is calculated using a methodology that has been independently audited against internationally recognized standards.

The CME contract has a tick size of $5 and is traded in U. dollars per bitcoin.

One bitcoin futures contract equals five bitcoins. The CME offers three different expiration dates for its contracts: the nearest two months in the March quarterly cycle (including the front month), the nearest two months in the June quarterly cycle, and the nearest two months in the September quarterly cycle (including the front month).

The ticker symbols for Bitcoin futures are BTC on both the CBOE Futures Exchange (CFE) and the CME, with each contract representing five bitcoins.

The table below shows the open interest and trading volume by day for BTC futures from January 1, 2018 through December 31, 2018 on both exchanges:

| Date | Open Interest (BTC) | Trading Volume (BTC) |
| 1/1/2018 | 2 | 12 |
| 1/2/2018 | 4 | 25 |
| 1/3/2018 | 7 | 42 |

Bitcoin derivatives offer traders exposure to cryptocurrency price movements without having to hold any actual bitcoins. This can be beneficial for those who want to speculate on cryptocurrency prices but do not want to deal with the hassle of storing and safeguarding digital assets.

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