2021 has been a landmark year in the world of crypto. Digital assets have flooded the financial market, and Ether Futures are joining their ranks.
Whether you enjoy shopping online, transacting abroad, or playing at the best crypto casino, cryptocurrencies and digital assets are becoming more versatile, and their uses are expanding.
Ether futures now offer investors a new way of joining the crypto industry. But, what are they? And how do they fit into the bigger picture?
Read on as we discover the ins and outs of Ether futures.
What Is Ether Futures Trading?
A futures contract entails the trade of an underlying asset at a set price at a specific future date. The underlying asset for Ether futures is the Ethereum (ETH) cryptocurrency. However, instead of having the seller give ETH to the buyer on the settlement date, futures contracts are settled for cash.
If the settlement price of ETH is higher than the contract price, the seller will pay the difference—in US Dollars—between the contract price and the settlement price. Similarly, if the settlement price is lower than the contract price, the buyer will pay the seller the difference in US Dollars.
But, what price do they use?
The Ether futures contract monitors the price of ETH using the CME CF Ether-Dollar Reference Rate (ETHUSD_RR) on the platform. The system gathers price information on ETH trades from established crypto exchanges such as Kraken, Coinbase, or Bitstamp and then calculates a volume-weighted average price (VWAP) for ETH daily.
Each contract is valued at 50 ETH and priced in U.S. dollars. There is a maximum order size of 100 contracts on CME Globex’s platform. The exchange’s electronic trading solution operates continuously to cater to traders from all parts of the world.
Whatever the price of ETH is at the point of expiry—when the contract is scheduled to be settled—both the buyer and seller have to honor their agreement to buy and sell the contract, respectively.
How Are Futures Contracts Valued?
Though futures contracts are relatively straightforward in their fundamental design, a question that many investors ask is, “How is the value of these contracts tracked?”
Simply, different platforms use different reference data sets and engage in real-time Ether price points aggregated from a wide variety of established trading platforms such as Kraken, Coinbase, and Bitstamp, to name a few.
The value of Ethereum collected from these different exchanges undergoes a volume-weighted average price (VWAP) standardization every 24 hours, after which a final value is used for settling all contracts.
Investors should understand where the reference prices come from for a specific contract or exchange and ensure it is a reputable and stable source. Investors must do their research on exchanges before committing their funds.
If an exchange is fond of having flash crashes, that could cause a contract to get liquidated early—leaving investors in a sticky situation.
The Pros and Cons Of Trading Ether Futures
One of the biggest attractions of Ether futures trading is the ability to gain leveraged exposure to the underlying cryptocurrency at a fraction of its total market value. Essentially, this suggests that you can manipulate slight movements in price to generate enormous profits.
Here are the pros and cons of trading contracts:
- Investors can get exposure to the world of digital assets without the need to go through unregulated crypto exchanges and register for digital wallets.
- Investors can use leverage to boost their capital efficiency.
- Investors have flexibility as non-ETH holders can speculate the price of Ether and make a quick profit. This is done if they open a position in an Ether futures contract with USDT while all profits earned from the contract will be settled in USDT.
- Investors can enjoy trading in an extremely liquid market that Ether futures are a part of. With a trading volume of trillions, a liquid market is less risky for investors, as they can enter and exit their positions seamlessly with much-reduced slippage.
- Investors who want to diversify their portfolios to generate greater profits will love Ether futures as they can develop sophisticated trading strategies like pairs trading, arbitrage, and short selling, to name a few.
- Investors are not eligible for any Ethereum forked coins (coins that are produced from hard forks when a blockchain splits to create a brand new chain)
- Investors don’t have the option of airdrops—crypto projects that distribute free tokens to investors. Airdrops are typically given when investors complete specific tasks, belong to specific communities, or encourage investors to adopt them.
- Ether futures are not suitable for newbie investors, as there is a high entry-level barrier to navigate. The minimum purchase amount for a single contract costs the US Dollar equivalent of 50 ETH. That’s an exorbitant amount to outlay for a speculative return—especially for new investors who want to enter the digital asset space.
- Investors could potentially experience a poor return on investment as Ether futures trading carries a liability risk—meaning investors can lose much more than just their initial investment. In some very rare cases, traders have become bankrupt after trading futures contracts since there is no limit on how high or low the price of an underlying asset can go.
- Ether futures contracts are driven by speculation that could lead to devastating losses for investors, mostly because of the utility and design of those contracts. Investors who are not familiar with financial management techniques like stop-loss orders are vulnerable to potential losses.
Using CME To Trade
Investors who want to trade Ether futures on the CME must first set up an account with a registered broker. Once the account has been verified and opened, investors need to place an order through their broker and specify how many contracts they would like to trade.
Investors must specify an expiry month for the contract. Transaction fees vary depending on the volume traded and the type of account used, and all fees associated with Ether futures are listed on CME’s platform.
The Impact That Futures Have On The Price Of ETH
Ether futures have given investors a chance to hedge against crypto market positions—a market where cryptocurrencies and digital assets are traded with immediate delivery. This makes Ethereum a much more attractive option for crypto investors and encourages the liquidity and profitability of the crypto ecosystem, and enhances its overall maturity.
However, in certain circumstances, Ether futures could have a damaging effect on the underlying price of Ether.
If the futures markets shut down for the day or weekend during high market volatility periods, there is a possibility that gaps will appear on futures charts. This means that the price closes at a specific point and then reopens for the new day or week at an entirely different price point.
These gaps are filled when traders drive the asset to its original price before the gap appears. In such instances, however, the price of the underlying asset may move in tandem as arbitrage traders profit from the difference between the various exchanges.
Therefore, if a gap appears on the Ether futures chart, it is possible that it could directly impact the actual price of Ethereum and cause greater volatility.
Why Are Ether Futures Important?
Trading in Ether futures is highly beneficial for attracting fresh institutional investors to the market. Especially when trading on large futures exchanges like CME.
Many institutions want to immerse themselves in the crypto market but don’t have access to the spot market. With that being said, there is definitely a niche in the Ether futures market since it allows institutions to engage in the crypto market without explicit access.
Ether futures are also beneficial because they enable ETH traders to hedge against future price fluctuations.
They are a vital tool for price discovery by market participants. Ether futures offer traders long and short options, so they do not have to bet against only one side. This is quite the opposite of the cash market, where traders are restricted to long-hold positions.
Ether futures are also crucial for the growth of the markets and lead the way for other innovative products that investors and traders can use.
The growing interest in Ether futures products shows the ever-increasing interest in Ethereum’s development, including ETH 2.0, De-Fi, and stable coins.
Micro Ether Futures
Micro Ether futures are the latest offering for traders and were launched by the CME Group in December 2021. This innovation has brought greater diversification to crypto traders as micro Ether futures contracts are closely linked to the original Ether futures. Being based on the same underlying reference index, the CME Ether-Dollar Reference Rate and is settled in cash.
Tim McCourt, CME Group Global Head of Equity Index and Alternative Investment Products, said:
“Micro-sized contracts for both Bitcoin and Ether futures have taken our cryptocurrency product offering to the next level. We’re pleased with the early adoption and rapid growth of Micro Ether futures since their launch on December 6. These contracts are providing one more way for both financial institutions and sophisticated, active retail traders to gain exposure to digital assets through our liquid and trusted cryptocurrency derivatives markets.”
The micro Ether futures are priced off at the index, which was created in collaboration with Crypto Facilities, to give real-time Ether price in US Dollars. The index references pricing data and uses transactions and order book activity from many cryptocurrency exchanges, including Kraken and Bitstamp.
The micro Ether futures contract incorporates only 1/10 of the notional value of the original contract. CME is certainly looking well into 2022 and says that micro Ether futures open a different avenue in the promising crypto futures market that will give new access to retail investors—either those looking to divert into different markets or struggling to take part because of limited capitalization.
Interestingly, this launch of micro Ether futures comes a few months after the launch of micro Bitcoin futures.
These are certainly exciting times for investors who want to diversify their portfolios in 2022. While everybody is riding on the crypto hype and NFTs have proved to be a hit in 2021, perhaps investors will look at Ether futures as a solid investment option to complement their current portfolios.
By trading futures contracts, investors can profit from the future price movements of Ether and enter the crypto market without having to go through unregulated crypto exchanges or set up crypto wallets.
Do your research before committing your funds to any futures contracts – Good Luck!