Understanding the differences in Bitcoin futures on Binance and CME

Open interest on Bitcoin futures listed on the Chicago Mercantile Exchange (CME) has been outpacing open interest on Binance futures since November 2023. As of Jan. 23, around 30% of the total open interest in the Bitcoin futures market is on CME.

However, as spot Bitcoin ETFs begin to gain traction in the U.S., amassing over $1 billion in inflows over 12 days, institutional traders seem to be ditching their futures positions in favor of the new institutional investment vehicle.

CryptoSlate reported a significant one-drop in CME open interest on Jan. 12, which sparked a sharp downward trend. And while open interest on CME still remains well above the open interest on Binance, some analysts believe we could see a further reduction in CME OI in the coming weeks. This could lead Binance to regain its top position in the Bitcoin futures market.

This shift can have a significant impact on the market. However, to understand the importance of this shift and its implications, it’s crucial to understand the mechanisms behind CME and Binance futures and the difference between the two platforms.

CME Bitcoin futures

The Chicago Mercantile Exchange (CME) is one of the largest derivatives exchanges in the world. It launched Bitcoin futures in December 2017, marking a significant step in bringing cryptocurrency into mainstream finance.

As a U.S. exchange, CME operates under the stringent regulatory framework of the Commodity Futures Trading Commission (CFTC). This regulatory compliance is pivotal for U.S. traders and institutions, offering a level of security and legal assurance critical for substantial investments.

Future contracts on CME are only cash-settled. Cash settlement in futures contracts means that once the contract expires, the holder receives or pays the difference between the contract price (the price at which they agreed to buy/sell the asset) and the spot price of the asset (the market price of the asset at the time of contract expiration). This is settled in cash rather than the physical delivery of the asset, which in this case is Bitcoin.

For example, if investors hold a long position and the spot price of Bitcoin at expiration is higher than their contract price, they’ll receive the difference in cash. Conversely, if they’re in a short position and the spot price is lower than their contract price at expiration, they’ll make a profit paid in cash. This mechanism is beneficial for traders who wish to speculate on the price of Bitcoin without the need to handle the actual cryptocurrency. It eliminates the challenges of storage, security, and potential regulatory issues associated with holding Bitcoin.

Each CME Bitcoin futures contract represents five bitcoins. This is a standard size and does not change. Prices are quoted in U.S. dollars per bitcoin, with a minimum fluctuation of $5 per bitcoin, equating to $25 per contract.

Contracts are available for trading in the nearest two months in the quarterly cycle of March, June, September, and December. CME’s electronic trading platform, Globex, typically operates in U.S. time zones from Sunday evening to Friday afternoon, with a daily maintenance break. Trading ceases at 4:00 p.m. London time on the last Friday of the contract month. Extended trading hours are available, which is significant for Bitcoin futures due to the 24/7 nature of the cryptocurrency markets, though it’s not round-the-clock like on dedicated crypto exchanges.

Regarding CME’s price discovery mechanism, the platform utilizes 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 of the U.S. dollar price of Bitcoin. The BRR is calculated by taking the volume-weighted average price (VWAP) of Bitcoin across these exchanges.

Binance Bitcoin futures

Founded in 2017, Binance is the largest and most popular crypto exchange by almost any metric. It introduced Bitcoin futures in September 2019, expanding its rich spot trading offer and entering the derivatives market.

As Binance is a global exchange operating in multiple jurisdictions, it’s subject to the regulatory frameworks of all countries where it provides services. However, regulating futures and other derivatives trading on Binance is not as straightforward as for CME, which is regulated by a single entity. Due to the complexity of regulating financial markets, Binance doesn’t offer derivatives trading in all regions it operates in. For instance, users from the United States have restricted access to Binance’s full range of services, including futures trading.

Unlike CME, Binance offers both physical and cash settlements. In physically settled futures contracts, the trader receives the actual underlying asset (in this case, Bitcoin) once the contract expires. For the exchange, this involves the actual transfer of Bitcoin from the short position holders to the long position holders. Physical settlement can impact the spot market as actual Bitcoins are bought or sold to fulfill these contracts.

In the case of cash settlements, Binance may use either U.S. dollars or stablecoins. The currency used depends on the contract’s terms and the trader’s account settings. Data from Binance indicates that most cash settlements are done in USDT, which removes the need for traditional banking systems, allowing faster and more seamless transactions.

Futures contracts on Binance come in a wide range of sizes, with some being fractions of a Bitcoin. One of the key features of Binance futures is the availability of high leverage, sometimes exceeding 100x. The platform also provides continuous trading for Bitcoin futures, a significant difference from traditional markets like CME, and allows traders to react instantly to market news and events.

Price discovery for Binance futures is primarily driven by the trading activity within its own platform. However, for certain contracts,  Binance uses an Index Price, a composite price derived from multiple spot markets. This helps in mitigating the risk of price manipulation on the exchange.

Implications for market dominance

The different features of CME and Binance futures could influence Binance’s ability to overtake CME in Bitcoin futures open interest. The U.S. now has 11 regulated spot-Bitcoin ETFs, which saw $6.4 billion volume between Jan. 11 and Jan. 22. These ETFs could become appealing to a growing number of institutional investors, as they offer a well-known investment vehicle with a significantly lower risk profile compared to futures.

As institutional investors begin unwinding their derivatives positions, retail could jump in to take advantage of the futures market. Binance, with its flexible contract sizes, high leverage, and round-the-clock trading, caters to a growing market segment — slightly more advanced retail traders in regions with less stringent regulatory environments. These traders could see Binance’s high leverage and the ability to trade physically settled futures to grow their BTC positions and benefit from market volatility.

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