Jul 10, 2023
CME's new ETH/BTC Ratio is a future whose time has come
CME Group is continuing the recent faster cadence of expansion of its suite of crypto derivative contracts with its first ratio product: Ether/Bitcoin Ratio Futures. Like all crypto contracts offered by the world's largest derivatives marketplace, Ether/Bitcoin Ratio Futures will settle to regulated cryptocurrency reference rates published and administered by CF Benchmarks, in this case, our CME CF Bitcoin Reference Rate (BRR) and CME CF Ether-Dollar Reference Rate.
This means that just like all other CME cryptocurrency derivative contracts, ETH/BTC Futures are secured by the end-to-end regulation inherent in the CME’s CFTC-regulated trading venue, and CFB’s regulated benchmark methodology.
Pending regulatory approval, this new contract will be available to trade from July 31st.
The advent of CME Ether/Bitcoin Ratio Futures might appear to be a novel turn within the context of the venue’s other contracts providing crypto exposure, each of which are instruments structured around single assets. However, rationales driving the creation of the ETH/BTC ratio future are cogent with the evolution of demand for exposure to the two largest cryptoassets by market capitalization.
As CME notes here:
“Bitcoin and Ether, the two largest cryptocurrencies by market cap, are highly correlated. As the relative strength of the correlation fluctuates, market idiosyncrasies may affect one coin more so than the other creating trading opportunities.”
ETH vs. BTC
In other words, the principal facility offered by the ETH/BTC ratio is the ability to execute a relative value trade of the kind commonly undertaken by institutional capital markets participants. This makes the ratio an ideal way to express a perspective on the blockchain economic outlook of Bitcoin and Ether, particularly with regards to adoption.
In ‘classic’ relative value trades executed through a ratio structure, for instance, the silver/gold ratio, the participant generally expects one side of the ratio to predominate over a certain period of time, as it responds to macroeconomic or market-specific developments that may have a negative or positive impact on the price of one or both ratio assets.
Likewise, Ether/Bitcoin Ratio Futures may be expected to reflect the impact of dominant developments important to these blockchains. For instance, the probability of the first U.S.-listed spot crypto ETF being one that invests in Bitcoin, vs. the probability that it’s an Ether ETF. Or perhaps certain traders may deploy the ratio to exploit a strong view (and optimistic timing) of the so-called ‘flippening’, or the short-term impact of Bitcoin’s next ‘halving’, among other potential scenarios.
How it works
Technically speaking, the ratio is predictably defined as the price of the CME’s Ether Futures divided by the price of CME Bitcoin Futures. Likewise, settlement is determined by the division of the Ether Futures Final Settlement Price (based on our CME CF Ether-Dollar Reference Rate) by the CME Bitcoin Futures Final Settlement Price (the latter based on CME CF BRR). Expiration months will be identical and the ratio will always be positive.